Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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..........................................................................................................................................................................................Price History ................................................... 36 Figure 17: Study Market Methodology ............. 25 Figure 7: Outlet Representation by Mode.............................................................. 48 Figure 25: Outlet / Volume Relationship ...................Selected Centres ...............................Regional & Urban Groupings................................................................................................ Pump Price (nominal ¢/litre).................................................. 34 Figure 15: Monthly Rack Prices: Selected Markets .............Price History .......................... 62 Figure 33: Ottawa ............................................... 70 Figure 37: Charlottetown .......................Selected Goods & Services ....................................... 33 Figure 13: Monthly Gross Marketing Margins..Regular Unleaded ............... 58 Figure 32: Toronto ......................................... 24 Figure 6: 1995 Retail Outlets by Province .................... 16 Figure 3: 1996 Average Regular Gasoline Margins (56.................................tax....... 66 Figure 35: Saint John NB ......................................... 4 Figure 2: 1996 Average Prices/Margins ......... 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ................. 57 Figure 31: Winnipeg .............................................Price History................ 42 Figure 19: Pump Price ........... 28 Figure 8: Outlet Representation by Service ............................................................Price History..... 49 Figure 26: Outlet Revenues........................................................................................................ 40 Figure 18: 1995 Average "Blended" Pump Price ........ 30 Figure 10: CPI Index Comparison ..........................................................................................Price History ............................................................................................Price History........................... 54 Figure 29: Calgary ........................... 29 Figure 9: Annual Gasoline Price (Cents per Litre) ...........................................................................Price History ................................................................. 46 Figure 23: Average Annual Throughput per Outlet.....................List of Figures Figure 1: Pump Price / Margin Model.................... 35 Figure 16: Monthly Demand vs.. 24 Figure 5: Canadian Retail Outlet Population . 56 Figure 30: Regina ................................................................................................................ 43 Figure 20: Ex-Tax Pump Price Elements ......1988-1995 ........................................................................................................................ ex-tax elements ................................................................................................................................................ 50 Figure 27: Victoria ... 53 Figure 28: Vancouver ................ 71 MJ ERVIN & ASSOCIATES i .................... 63 Figure 34: Montreal . Costs...................... 32 Figure 12: Monthly Margins 1991-1996 (Nominal $).................Price History... 47 Figure 24: Outlet Volume vs.......................... Income..........................................................Price History ................................................ 44 Figure 21: Gross Marketing Margin Elements ................................................................................................................................................................................ 69 Figure 36: Halifax ............................................ Gross Product Margin ...................... 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category.............Price History........... 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) ...............................................................................................Price History ...........................8¢ Pump Price) .................. 45 Figure 22: Petroleum Gross Product Margins ...................

.............................................................List of Tables Table 1: Downstream Sales Channels ............................................... 51 MJ ERVIN & ASSOCIATES ii ....................................................................................... 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue.. 1996 ................. 15 Table 3: Selected Study Markets ............................... 13 Table 2: Taxes on Regular Gasoline on December 31......................

Natural Resources Canada (NRCan). The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. and a foundation for effective policy development. Price competition occurs at three distinct levels in this industry. rack.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs.3 ¢ 28.2 ¢ 24. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry. dealer income.5 cents per litre on the sale of regular gasoline in a typical major urban market. together with a separate review of the refining sector. This study. supplier costs and profitability. These prices are determined in a competitive marketplace. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada.4 ¢ 19.1 ¢ 5.5 ¢ 0. and ex-tax pump prices. each with unique MJ ERVIN & ASSOCIATES iii .Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada. represented by crude. the Canadian retail marketing sector realized an average gross product margin of 3. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56. and the Canadian Petroleum Products Institute (CPPI).6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.8 ¢ TAX 28. 1996 Average Prices and Margins .

compared to about 22. The resultant margins are therefore a reflection of the state of product supply. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). Dealers have a variety of relationships with their supplier.000 in 1989. are examples of ways in which outlet petroleum sales are augmented by other revenues. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. nine of the past ten years. Approximately 16. this study focuses on the retail gasoline sector. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. From 1986 to 1995.500 retail outlets were in operation in Canada in 1995. While each of these marketing channels operates in a competitive environment. and declined by 10 cents per litre measured in constant dollars. due to its prominence in the public and media domain. which potentially allow for reduced margins at the gasoline pump.dynamics. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. Convenience store. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. and the traditional automotive service bay. demand and other competitive factors existing at the time. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). car wash. well over half of all outlets in Canada operate as lessees or independents. and accordingly. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv .

Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. This has both resulted in. As a result of these trends.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994.crude) 5¢ Marketing Margin (retail . the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre.The “tax-included” nominal pump price increased over this same period. From 1991 to 1996. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . and has been a result of several factors including: • • • improved refinery utilization and efficiency. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases. however. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. as a consequence of refinery plant rationalization (closures) and a modest demand increase. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump. MJ ERVIN & ASSOCIATES v .

to derive 1995 average petroleum gross product margins for each of the 19 markets. That such a relationship should exist was not surprising. When petroleum gross product margins were compared to their corresponding outlet throughputs. MJ ERVIN & ASSOCIATES vi . With the participation of several CPPI member companies. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput.Comparison of Canada. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. With few exceptions. and one by one. A wide range of petroleum gross product margins were evident. wholesale product cost and freight charges) were isolated from the pump price. were selected for a detailed review of outlet economics. This was integrated with selected NRCan price data. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. rural markets. although this study provides an independent confirmation of this. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. several “outside variables” (product taxes. This provided for market-bymarket and regional comparisons of key competitiveness indicators. 19 markets representing a broad range of conditions. but also had significantly higher throughputs per outlet.

and his personal labour investment.6634Ln(x) + 76. Consequently. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii . • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. of which gross product margin and throughput are only two of several factors.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool. an additional goal of this study was to undertake a comparison of outlet profitabilities. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.000. which reflects his investment in the outlet. revenues from ancillary operations (eg: convenience store.000 3. smaller markets. supplier profit: after the above costs are allocated. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer. not poor competition.000 Volume (litres) 4.000 5. head office and regional office overheads.000 2. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. sales processing. brand advertising.000. and in major vs. corporate charity.000. This study showed that an average outlet net revenue in the 19-market study group was about $70.000.• Smaller markets performed as competitively as larger centres. etc. These costs would include salaries of marketing representatives and management.962 R2 = 0.000. the residual revenue is available as profit to be re-invested into retail operations. and/or distributed to shareholders.000.000 6..000.6624 1.

rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions. Despite this difference.000 $250.000 per year.000 $150. were insufficient to cover outlet costs.000) $(300. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers. at 1995 prices.000) $(200.market study group. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector.000 vs.000) $(250.000 $50.$154. suppliers likely incurred a net loss on outlet operations in 1995. after allowing for estimated dealer profit and supplier overhead. distant outlets are clearly higher than those associated with concentrated urban markets. 1. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers. for which this study had no specific data. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.000 $200.000) $(350. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii . but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets . Although an objective measure of competitiveness is elusive. by all objective measures available to this study. The Canadian retail petroleum products industry. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector.000) $(100.000 $100. and that petroleum sales revenues alone. respectively.000) $(150. $61. Average Outlet Income (before marketing overhead costs) BC/PR $300.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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virtually all of the 19 study markets exhibited similar levels of competition. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. if Canadian average pump prices were only one cent higher than they were in 1995. although this study provides comprehensive evidence of this. but to increases in underlying rack prices. 7. Also. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). assuming all other costs were unchanged. these findings clearly show that pump price increases are ultimately linked not to increased profits. Nevertheless. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. despite the predisposition of many observers to use them as such. 8. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . Thus. That such a relationship should exist was not surprising. regardless of size. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. When plotted against the margin-volume model. Industry profitability is extremely sensitive to very small changes in pump price. most markets. based upon an assumed posted rack price. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. not excessive profits. A wide range of petroleum gross product margins were evident within the 19market study group. this industry sector would have realized profits of unprecedented proportions. Also. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. Outlet throughput is a key determinant of inter-market pump price differences.• • • improving production efficiency through refinery plant rationalizations (closures). profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. and in turn. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). While these economics might appear to place this industry in a position of poor viability. and the associated industry initiatives which are ongoing in nature. Thus. Both the downward trend in margins. Indeed. serve as perhaps the most significant indicators of competitiveness in the downstream industry. crude costs. had petroleum margins which were commensurate with average outlet throughput for that market. When these margins were compared to their corresponding outlet throughputs. most outlets used in the 19-market study represent major integrated oil companies. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. Thus. in the long term these fluctuations are likely more reflective of market restorations. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé.

• The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. poor outlet throughputs were generally the predominant factor.5 million fewer litres of gasoline than a group A (major centre) station. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. MJ ERVIN & ASSOCIATES xiii . which should. A full-serve retail gasoline outlet typically employs 3-5 staff. more isolated markets are generally higher than in larger centres. While competitiveness in most smaller markets was shown to be as active as in larger centres. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. 9. according to the margin-volume model.product margins than larger markets. in order to build upon the findings in this study towards a full understanding of the dynamics at work. The loss of employment represented by a station closure may be of some concern to smaller communities. • • At first glance. In suggesting this approach however. thereby improving petroleum volumes and ancillary revenues at the remaining sites. The costs of most consumer goods in smaller. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. isolated markets face particular challenges: although found to be highly competitive. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. other factors exist which contribute to relatively high margins and prices. it would seem that if local government in smaller markets were interested in lowering pump prices. This created some economic pressure to sell product at a higher pump price. there are three points to consider: • • In very small markets. average pump prices were relatively high. Smaller. which could actually inhibit competition. reducing the number of outlets may also reduce the number of competitors. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. and this study showed that gasoline prices were no exception. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). reduce pump prices. the solution would be to encourage some dealers to exit the market.

depressed petroleum revenues. is viewed as an agency which exists to the benefit of industry and consumer alike. Also. that where a healthy competitive climate exists. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. as it does in the Canadian petroleum marketing sector. and in turn. is both the cause and consequence of increased activity in ancillary operations. and the perceived effect on their markets. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. Retail ancillary operations are a critical element of petroleum price competition. does not appear to benefit in consumer terms. and as such. The federal Competition Bureau for example. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. the degree of price competition in the retail petroleum has in effect. and the traditional automotive service bay. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. direct regulatory interventions may have an adverse effect on competitiveness. is well beyond the scope of this study. As these findings show. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). sometimes below that of outlet operating costs. 11. has seen a decline in pump prices relative to other Canadian markets. possibly to the detriment of the consumer. This competition then. This study proposes rather. car wash. The historical record is clear however: since deregulating pump prices. MJ ERVIN & ASSOCIATES xiv . were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. under the current PEI regulatory structure. as marketers find even more innovative ways to attract market share. Charlottetown.10. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. the Halifax market. characterized by narrow product margins and relatively flat pump prices. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. and likely others in Nova Scotia. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). many national and local environmental regulations exist for good cause. will likely preserve a highly competitive petroleum market. Convenience store. are an acceptable limitation on pure competition (Finding 8).

2. along the lines of the model used in this study. petroleum marketing competitiveness. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. • • MJ ERVIN & ASSOCIATES xv . would ultimately be reflected in carefully-considered public policy which serves to truly enhance. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. Public perception measurement. not inhibit. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. using Canadian and foreign selected markets. and the nature of competitiveness influences. A regular comprehensive competitiveness evaluation. margins and competitiveness factors. This should be in the form of a quarterly summary of price trends and related measurements. and the converse image held in much of the public domain. Develop cooperative industry research into marketing sector competitiveness issues. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. in a simple format designed for consumers and legislators. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research.1. using Canadian and foreign selected markets. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Improve public understanding and awareness of competition in the petroleum marketing sector.

consumers. using Canadian and foreign selected markets. is vital if Canadians are to put in place the structures that truly meet their social and economic needs.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. and regulators alike. and in particular. • * * * Better understanding of this industry. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. MJ ERVIN & ASSOCIATES xvi . and issues/opportunities facing such markets. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. by industry.

and regional differences which face the petroleum products retail industry.” MJ ERVIN & ASSOCIATES 1 . and in comparison to the Canadian national average and nearby USA markets”. to name a few.. competitive pressures from US and offshore refiners.Introduction Background Canada’s petroleum refining and marketing sectors. and a challenging array of potential environmental initiatives.. which comprise the “downstream” oil industry. Project Objectives The working group established as the primary objective of this study “.. and MJ Ervin & Associates was selected to undertake the “rack to retail”. In 1995. or even communities within the same region. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made. and that issues and challenges be identified so that conclusions and recommendations can be made “..to help the industry cope and to enhance competitiveness.. the Canadian Petroleum Products Institute (CPPI). .. A working group represented by Natural Resources Canada (NRCan). The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry... Specific purposes of this study would be: • • • • “... Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry. face a number of challenges: a poor public image. leading to more effective policies and reduced uncertainty for future investment. and Industry Canada was convened to undertake this project..to determine the key factors which drive competitiveness in specific markets.. region by region across Canada. and in the process. including a regional.to analyze the rack to retail market and the market structure for refined petroleum products.to draw comparisons with nearby USA markets.to provide a sound database upon which more effective policy decisions can be made. The SCF laid the foundation for supplementary studies. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump.to better understand the competitive opportunities and challenges. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector. . or petroleum marketing portion of the study. and .

and a foundation for effective policy development. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. Supporting data to these charts can be found in Appendix II. Part C: Historical Trend Analysis provides an overview of prices. due to the considerable data gathering difficulties that such an approach would entail. • Part E: Conclusions and Recommendations summarizes the study findings and. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). presents conclusions and recommendations which arise from the study findings. Ultimately. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. Findings are stated in bold and are summarized in part E of this report. or which have a specific meaning in the context of this report. and in order to provide insights into the range of competitive dynamics that can exist. Many of the findings in this report are presented in graphical form. It also relates consumer demand patterns to pump price fluctuations. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure.The study meets these objectives. Specific comparisons of specific Canadian and US consumer markets were not made. in Appendix I. and the effect of competitiveness on each subsector. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . Part D: Selected Market Study presents the findings of a diverse 19-market study. Unless otherwise stated. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. undertaken as part of this project to: • make a more detailed examination of price. from which some important findings are made. through a multi-faceted approach. The study does provide comparisons with US markets on a national level of detail. margins and demand patterns over the past several years.

for their assistance. assisted in securing the support and participation of member companies in the selected markets phase of the study. and their 481 retail associates whose outlet data was used in our analysis. chaired the steering committee. Natural Resources Canada. including Ultramar Canada... and Shell Canada.. Shell Canada. MJ ERVIN & ASSOCIATES 3 . Imperial Oil Ltd. Ministère des ressources naturelles du Québec.• Industry Canada. We gratefully acknowledge these companies. The Canadian Petroleum Products Institute. NRCan. Suncor Inc. These included: Canadian Tire Petroleum. and also participated in the steering committee. Ontario Ministry of Environment and Energy. through Bob Clapp. and Industry Canada. Consumers Association of Canada. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. Petro-Canada. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). • • Several organizations participated in two key review sessions. and provided critical guidance and feedback at several key stages in the process. Petro-Canada. Environment Canada.. facilitated some of the data gathering needs of this study. CPPI. through Maureen Monaghan and Huguette Montcalm. Finally. Suncor Inc.

To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. as they are in Figure 1. In fact. And. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 .which is used by many groups and individuals to assess the competitiveness of the petroleum industry. Yet.price . multifaceted industry. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. the particular quality of gasoline which is of most interest to consumers is not its colour. It is this particular feature of petroleum products . pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry. but simply. or taste. most Canadians relate to this industry in one specific way: as consumers. as this study shows. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. principally of motor gasoline. its price. and serves to explain several factors that together determine retail gasoline prices at any given time. These relationships can be modeled.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. texture. unlike many consumer products.

gross margin represents revenue only. and in fact inextricably related. it is important to define the term “margin”. this study examines competitiveness from the latter. MJ ERVIN & ASSOCIATES 5 . Before examining each of the model elements.Many of the terms introduced and explained in this section are used extensively throughout this study. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. While both perspectives are valid. any operating expenses must then be considered before making any determination of profits. consumer perspective. objective measurement for competitiveness. While this term is often associated with the phrase “profit margin”. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. Each margin is quantified by its defining prices. each essentially taking a share1 . A consumer however.or margin . Ultimately however. So defined. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. “competitive” may be synonymous with “viable”. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard.from the total pump revenue. is more likely to equate the term with “value for money”. an understanding of the term itself is necessary. Gross margin is simply the difference between two price points. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). (implying that the stated margin represents net income or “profit”). evaluating competitiveness is therefore a partly subjective process. margins are squeezed or expanded accordingly. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. these stakeholder revenues are derived from the revenue from the retail sale. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. From an industry perspective. this study’s use of the term relates to gross margin.

Accordingly. Inevitably. competitors can either restore higher prices or reduce costs. 1986: “Competition may mean very different things to different people.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers.” “. a universally acceptable definition of competitiveness is elusive. More importantly. or in other words.. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. improving efficiencies. reducing costs. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. and ideally many entities offer the same or similar products (brand variety). any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. provide some means for comparing the type and to some extent. and unless care is taken to use the word precisely. as competitors seek to attract market share through lower prices. Conditions for a competitive market can be deemed to exist when: • • more than one. represents a process by which prices are set. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . if market conditions allow a sufficient number of players to remain profitably engaged. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. it can frustrate communication and obscure analysis. is the only real option in the long term. The actions by business rivals place an upper limit on the prices a firm can charge for its products. in order to maintain some level of brand variety. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. Simply put. To achieve this. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. Competition can only be sustained therefore. the degree of competition within a market.” Price Competition in the Oil Industry In order to assess competitiveness. Since a competitive market effectively limits the price option. and the entry of new competitors and new ideas. this usually requires a reasonable number of competitors. the result of price competition is reduced profit.Unlike many business or economic concepts. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). in the sense in which it is something in the public interest. one must ask how marketers compete. An effective functioning of markets also permits smaller competitors to expand if they meet the test. Price competition.. Technological change and innovation are the large levers of competition in industry.

The converse notion that the industry establishes a “should be” margin. most Canadians relate more in terms of retail gasoline marketing.the variables at their disposal. which in turn defines the margins. the “oil industry” consists of two distinct industries: the upstream industry. Ill. whose main activity is the exploration and development of crude oil. so a brief description of these. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale.: Richard D. A refiner in Toronto may well compete with a refiner in Buffalo. Irving. is false. Place. Basic Marketing: A Managerial Approach. and are generally known as integrated oil companies. p. or four P’s: Product. Given the commodity nature of petroleum products. which in turn defines a proper market price. (Homewood. and are beyond the scope of this study. and as will become more evident in this study. In fact. some organizations have operations in two or more of these markets. the geographic scale of competition is an important consideration. 4th Ed. MJ ERVIN & ASSOCIATES 7 . While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. Within the broad context of the oil industry. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. commonly known as the “marketing mix”1. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. It is also important to stress that the market ultimately sets rack and retail pump prices. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. The dynamics of upstream and refiner competition are major studies in themselves. 1960) 2 Although distinct. • Thus described. 1971).44 (1st Dec. competition in the crude and rack markets deserves some mention. the most effective of these as a competitive tool is price. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. Nevertheless. particularly in the crude (upstream) industry and refiner sector.. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. whose main 1 E. New York. and in retail markets. Price. and Promotion. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. and the downstream industry. Jerome McCarthy. the raw material from which gasoline is made. in rack markets.

While this study focuses on the downstream industry (and in particular. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry.activity is the refining of crude oil into petroleum products. drilling. Canadian producers are known as “price takers” rather than “price setters” of crude prices. MJ ERVIN & ASSOCIATES 8 . consequently. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. and transportation of crude oil to the refinery plant. rather than a fixed value. Infrastructure The upstream oil industry encompasses a broad range of operations. Canadian producers must compete to sell their production to refiners. in several commodities trading centres around the world. which it does on a continuous basis. production. our crude prices rise and fall according to price benchmarks established far beyond our own shores. and in the open market structure that exists in Canada. it is probably sufficient to say that. Crude oil is a commodity which is traded in a global marketplace. from the exploration for potential crude or gas reserves. due to variables such as crude quality. it is important to examine its relationship with its neighboring downstream industry. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. which finds and produces crude oil .the raw material from which gasoline is made. implying that it fluctuates. which gives an accurate portrayal of month-to-month crude price fluctuations. Within the scope of this study. Canadian producers have virtually no influence over world crude prices. its marketing operations). The upstream industry’s crude price is represented in Figure 1 as elastic. In providing historical comparisons of crude to rack/pump prices. and refinery production methods. and the delivery and sale of these products to the consumer. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. gasoline grade. that is to say. as a minor contributor to the world crude supply. Although this industry is not the focus of this study. alongside major producing countries such as Saudi Arabia.

The focus of this study is on the marketing sector of the downstream petroleum industry. involving energy. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. and lubricants. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study.1 cents per litre. day-to-day plant operations are cost-intensive. and pay out royalties to the resource owner. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. and from this feedstock. was 19. and marketers who. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. MJ ERVIN & ASSOCIATES 9 . and numerous safety and environmental safeguards. manufactures a range of refined petroleum products including gasolines. drill for. who manufacture petroleum products from crude oil. oil producers must explore for potential reserves. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. crude is only one of several factors that influence pump prices. personnel. is called the refinery. and some attention to the refiner sector is therefore given here. and hopefully realize some production. put simply. diesel.While some suggest that the price of gasoline should rise and fall exactly with the crude price. its predominant feature is the plant facility which. As is typical of many manufacturing organizations. From this revenue. heating fuels. In addition. buy refined products from the refiner and sell them to the end-use customer. in the petroleum sector. is the provincial government. or roughly 34 percent of the pump price. As a general measure: Finding 2: 1996 average crude price. A modern refinery is a sophisticated work of engineering. which in oil producing provinces such as Alberta. maintenance. This sector acquires crude oil. as a factor of the regular gasoline retail pump price.

the relative competitive strength of any given rack market is difficult to assess. transfer price . If for example. only rack price information is readily available in the public domain. as they relate to negotiated. The existence of rack price in a given market is not of itself. confidential terms between the seller and specific buyers. this model only uses the benchmark crude value. refiners sell their product under a variety of arrangements. there would be little or no market-driven competitiveness in the refiner sector. Of these three refiner prices. 2 MJ ERVIN & ASSOCIATES 10 . and a return on the considerable capital investment in the plant facility. Wholesale volume data is not readily available on a market-specific basis. being squeezed or expanded between these two price points. Contract and transfer prices are not openly shared. Although contract and transfer prices are distinct from rack price. reflecting the cost of transporting the crude from the producing region to the refinery plant. which provides an independent and objective determination of rack-based gross refiner margin. For a competitive rack market to exist. In simple terms. In fact the refiner typically pays a higher price than the benchmark crude price.the price charged for immediate supply on an “as available” basis. While refineries are always rack price points. Since both crude and rack prices fluctuate according to market forces. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. many of which do not have integral refineries. In fact. and accordingly.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement.this is the “internal” price charged by a refiner to the marketing arm of the same company. indicative of a competitive wholesale rack market. For simplicity. as this price point exists within the marketing sector. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. some clear competitiveness indicators exist. they use rack price as their basis. not the refiner sector. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. the gross refiner margin is elastic. representing major Canadian population centres. but with no material effect upon the Gross Product Margin derivation. the gross refiner margin is the price at which the refiner sells its refined product. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. This margin provides for plant operating costs as described above. On a national basis however. which can be broadly categorized as follows1: • • • rack price . external measurement of the current market value of a particular petroleum product. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. 1 Dealer Price is not included here. which may cause Gross Refiner Margin to be slightly overstated.Price/Margin Model Elements For simplicity. since the market-driven rack price provides an objective. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. less the price at which it bought its raw material2 (rack price minus crude price). contract price .

petrochemical producers. Canadian refiners must therefore be price competitive not only with each other. to major industrial consumers. but with their US and European counterparts.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . the question of the internal selling price. as there is no obvious market mechanism to regulate its setting. In these cases of so-called “integrated” refiner-marketers. many US and European refineries are in practice. even overseas. due to the relatively small transportation cost. for example. in order to maintain realistic accountabilities within each of the two sub-sectors. As shown in Figure 15 (page 35). and which supply petroleum to about one-third of all retail outlets in Canada1. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. market-driven Rack (wholesale) pricing of petroleum products. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. from any one of several regional refiners. to so-called “independent” petroleum marketers. would produce better than expected refiner income. In practical terms. In practice. this limits a marketer to a relatively short range (perhaps 1. The mechanisms that drive rack prices are more fully discussed on page 36. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. arises. potential sources of wholesale product supply for most Canadian non-refiner marketers. most refiners also participate in the marketing and retailing of petroleum products. market-driven rack prices. but at the expense of marketing income. MJ ERVIN & ASSOCIATES 11 . but where pipeline or marine fuel terminal facilities exist. or transfer price.000 km) for overland truck transport. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. Integrated Refiner-Marketers In Canada. and in the case of gasoline. 1 Based on Octane Magazine Retail Outlet Survey data. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. who themselves do not refine petroleum products. In examining the structure of the Canadian refiner sector. integrated refiner-marketers establish transfer prices at. who compete for a share of this demand. or close to. wholesale refined product is bought and sold across very large distances.for example.

this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. product is sold from a central facility. and aviation. Within this industry sector. which “sets” the retail price of gasoline. For this reason. media and regulatory attention. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. Retail Sales to the domestic motorist. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. as a popular and relevant “window” on the petroleum marketing sector. Wholesale Sales to a wide variety of customers. farming. principally into commercial trucking operators’ vehicles. Marketing operations within this sector can be broadly classified into three elements. trucking. the most recognized element of the downstream oil industry. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. including mining. and who essentially deal directly with the refiner. home heating.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. and purchase at or near the established rack price. or in the case of cardlock facilities. It is this sector which has direct contact with the petroleum consumer and it is this sector. gasoline price and competitiveness issues attract considerable public. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. each with its own distinct infrastructure. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. • • MJ ERVIN & ASSOCIATES 12 . in the minds of many consumers.

These outlets usually have considerable inventory capacity. such as product transport and/or storage. according to the contractual relationship between the supplier and the dealer. There are about 16. typically at the “rack point”. Retail outlets are operated in a variety of modes. Before examining this sector in detail. Sales of aviation fuels at major and secondary airports across Canada. as discussed. which is generally less than the rack price. and usually supply customers by delivery to the customer’s own storage tank. Sales to non-refiner petroleum marketers. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. There are over 850 cardlock outlets in Canada. Sales of petroleum products (principally gasoline) through retail gasoline outlets. Sales to commercial and industrial accounts by the wholesale marketing sector. Direct sales generally do not involve any marketing sector infrastructure. Sales of petroleum products through bulk sales outlets. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. using delivery tank trucks.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. often delivered by pipeline or ship/barge. in smaller centres. as principal elements of petroleum marketing operations. one final element of the pump price model must be reviewed. usually involving some aspect of the marketing sector infrastructure. to the motorist consumer. There are over 1. In major centres dedicated Home Heat centres provide this service. Sales of home heating fuels to residential furnace oil customers. heating fuel delivery is an integral part of a bulk sales outlet. to the aviation fuel consumer. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier.300 bulk sales outlets in Canada. MJ ERVIN & ASSOCIATES 13 .500 retail gasoline outlets in Canada. at a negotiated contract price. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. Sales to major industrial accounts. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. Sales to spot buyers at posted rack price. and regular gasoline in particular. which primarily serve long-disttance truckers and commercial delivery and haulage operators. by delivery tank truck. for example.

municipal taxes. and seven percent GST. If the pump price decreases for example. As part C of this study shows.2 cent (0. typically made up of: • • • • a ten cent per litre federal excise tax. A three-cent drop in pump price. tax content does fluctuate somewhat with pump price changes. regardless of market conditions. stable amount. MJ ERVIN & ASSOCIATES 14 . The petroleum industry acts as a collector of these taxes. the tax content of the petroleum price is essentially a pre-determined. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. would include a roughly 0.3 in Quebec) drop in the tax content.6 cents per litre (Canada 1996 10-city average). this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1. in a small number of markets. which amount to 28. or roughly 50 per cent of the pump price. Table 2 shows the provincial tax content for retail gasoline. 1 Due to the application of GST (and in Quebec. for example. PST). provincial sales tax. the tax content of retail gasoline in Canada has increased steadily over several years.

0 10.5 14.8 4.0 10.0 14.Table 2: Taxes on Regular Gasoline on December 31.5 12.0 28.0 3.0 10.6 3.2 24.1 32.0 11.6 3.7 3.5% sales tax applied to the GST-inclusive pump price. MJ ERVIN & ASSOCIATES 15 .7 13.4 3.0 10. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.0 28.5 cents was introduced in the Montreal and surrounding area in 1996.0 27.0 10.0 15.0 10.3 Federal Excise Tax 10.5 Total Tax 24.0 4.2 24.0 10. Provincial Tax 11.0 10.0 10. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.6 25.0 10.5 6.7 18.0 16.8 note 1 note 2 An additional tax of 1.0 3. All Quebec gasoline sales are subject to a 15.3 27.2 10. plus a 6.6 22.3 20.9 3.3 10.7 30.1 25.2 cent per litre pump tax.6 3. An additional pump tax of 1.0 cents is charged in the greater Victoria and Vancouver areas respectively.5 cents and 4.0 9.5 3.0 GST content (7% of pump) 3.0 10.0 10.6 3.

was available for product marketing operations.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry. to derive a representative value for regular gasoline gross product margin in Canada. Refiner operations realized 5. this section provides a view of the Canadian petroleum marketing sector. some profit return for the shareholder. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average). Figure 2: 1996 Average Prices/Margins . and potentially.8 ¢ TAX 28. The residual.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. Upstream operations realized 19.4 ¢ 19.1 ¢ 5. including retail outlet distribution. This 1 Prices and margins reflect a Canadian 10 city average. the brand supplier’s costs.3 cents per litre.5 ¢ 0. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements. and the retail gasoline sub-sector in particular. or 50.6 cents per litre.1 cents per litre.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28.5 cents per litre (after freight cost). or 9 percent. or 34 percent of the pump price.3 percent of the average regular gasoline posted pump price. 3.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56. and ancillary operations. MJ ERVIN & ASSOCIATES 16 . operating modes.3 ¢ 28. It also provides an overview of the industry in terms of several infrastructure parameters.2 ¢ 24. namely the dealer’s costs and income. based on regular unleaded gasoline.

It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. and is often out-sourced to third-party common carriers. Although many petroleum marketers conduct their own freight operations. and rack price. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. three key findings can be stated: Finding 4: Finding 5: In 1996. was 5. this is seen as a “non-core” business. Both refiner and marketing margins have been in decline over the past several years. As the product leaves the refinery plant. In 1996. it falls into the domain of the marketing sector. is usually the gas station. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. The marketing sector then. Bloomberg rack price values were used as the assumed wholesale price. was 3. Based on the 1996 data. The gross marketing margin.3 cents per litre. is defined by the marketdriven price points of ex-tax pump price. for example) is sold/transferred at the current rack or transfer price. the finished product (gasoline. or “rack to retail” margin. which in the case of retail gasoline.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. See page 10 for further explanation. as part C will describe. Freight cost does not typically fluctuate. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. petroleum taxes accounted for 50.5 cents per litre. In 1996. and is then transported to the retail outlet. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale.3 percent of the average urban price of regular gasoline in Canada. is the second of two elements of the downstream oil industry. and it is depicted in Figure 1 as a fixed cost element. Freight MJ ERVIN & ASSOCIATES 17 . In referring to marketing margins and product margins.

rural markets experience higher pump prices than do larger centres. and upstream/refiner margins. but at an average cost of over $200. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 .5 cents per litre in 1996. freight. as it represents 80% of all retail gasoline sales.3¢ 3.8¢ Pump Price) Upstream Operations 19. together with gas station dealers.costs are generally less than one-half cent per litre in most major Canadian cities. incur a variety of costs.6¢ Refiner Operations 5. • Product sales: Within this domain. Figure 3: 1996 Average Regular Gasoline Margins (56. which are typically close to a wholesale rack point.5¢ Product Operations Freight 0. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. Unlike most other retail enterprises however. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). as it excludes the “outside variables” of tax.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. typical of any retail business.000 per outlet.1¢ Tax 28. As represented in Figure 3. petroleum marketers. an average gross product margin for regular gasoline in a major Canadian city was 3. This is a particularly useful measurement in comparing retail gasoline markets. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products. Gross product margin is therefore defined as gross marketing margin less freight cost. Posted pump price includes all of these variables. storing and dispensing a product such as gasoline adds considerably to the operating cost. and is therefore a poor comparative tool.

competitive strategy of this type focuses heavily on selecting the best place. commonly known as the “marketing mix2. but in 1995 was typically 5 cents per litre for midgrade. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. as gas stations proliferated.44 (1st Dec. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. Price. but most consumers view gasoline as a commodity. This study does not examine such a broad issue however. Today. Ill. • Product In the past decade. gasoline).” or four P’s: Product. it represents a very small percentage of total retail petroleum sales. propane vs. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. etc. 1 Diesel is another petroleum product sold at many retail outlets. and Promotion. Higher octane grades are more expensive than RUL. Although revenue from this product is factored into the study market economics in Part D. marketers compete for the consumer’s choice of transportation energy (for example. marketers compete to be represented in as many and/or the best locations as possible. one must ask how marketers compete. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. Jerome McCarthy. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. Today. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. and accordingly. marketers have attempted with some success to differentiate their product offerings from other brands. page 24). expanded product/services offerings such as convenience items. Place. will ultimately purchase based on price. Place Typically. Basic Marketing: A Managerial Approach. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. Simply put.retail gasoline sales respectively1. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. Price competition has forced marketers to optimize outlet revenue. 2 E. 1971). seasonal blends. and 9 cents per litre for premium gasoline. and the price difference between these grades and the RUL price is referred to as the grade differential. 1960) MJ ERVIN & ASSOCIATES 19 . (Homewood.. p. The grade differential varies somewhat from city to city. additives. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. or when comparing price levels between markets. Irving. 4th Ed. rather than the most places. RUL prices are therefore most often cited when relating historical price trends.).: Richard D. a number of factors preclude this type of strategy. In order to measure competitiveness. A portion of the market certainly responds to this type of competitive strategy.

that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. and more importantly. This study presents an extensive historical and comparative analysis of pump prices. uniform prices . price has proven to be the most widely used competitive tool by gasoline marketers. and therefore “trades” within a relatively narrow price range.contrary to some public perception. Establishing an objective measurement of price as a competitiveness indicator however. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. fluctuating pump prices are a significant indicator of robust competition among marketers. At its extreme. gasoline is viewed by consumers as a commodity uniform in quality and widely available. their subsector margins. Examples are: • prominently displayed prices . Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. Promotion In the gasoline retailing sub-sector. this study examines the dynamics of price competition in considerable detail. Consequently.while uniform pump prices are sometimes cited as evidence of industry collusion. free item with purchase or special price item with purchase. volatile prices . is less clear. MJ ERVIN & ASSOCIATES 20 . Examples of promotional competition are: • • • brand identity gasoline discount coupon. probably due to its relatively high cost. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. • Price In most markets. • • • While examples of all of these indicators are abundantly in evidence. and due to the already slim margins available to marketers. Promotional activity seems to have decreased in the past few years. volatile pricing manifests itself in the form of a price war (see below). gasoline is a commodity. caused by price competition. In this context. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector.• • closure of non-viable outlets. low prices and/or margins. As such. due to the largely commodity nature of petroleum product.

and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. one must adopt the perspectives of both consumers and competing. To understand the phenomenon of uniform pump prices. If the posted price increase is too high. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. 1 This does not occur at company operated or commission outlets. the effect on many consumers is immediate: they will drive into that station. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. facilitated through street price signs. obviously at the expense of the supplier margin. and provide to the dealer what is commonly referred to as price support. in order to maintain a reasonable market share. for example). If one dealer decides to reduce pump prices (by two cents. or even less than. or even being squeezed to zero . since there is no “dealer margin”. the relationship between the supplier and dealer is generally as described on page 25. Whether through falling pump prices or rising rack prices. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. In the case of lessee or independent dealers however. MJ ERVIN & ASSOCIATES 21 . competitors may not follow. Pump price signs are an ubiquitous feature of the retail gasoline industry. competitors will likely match this price. The effect of this upon the gross marketing margin is obvious: it is squeezed. bypassing the higherpriced outlet. who then react quickly to the change. or when prices rise or fall apparently in unison. its effect is to restore some measure of the dealer margin. The other dealer has little choice but to quickly match. are indicators of a competitive market. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. This is a misconception. When this occurs. Pump prices therefore tend to move uniformly within a very short time. assuming that the rack price is unchanged.where the ex-tax pump price is equal to. the wholesale rack price. since they too must restore their gross product margins to sustainable levels.When pump prices are uniform. the supplier may temporarily intervene. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. adjacent dealers. or even undercut the competitor’s lower price. Price Support In times of “normal” pump prices. Finding 7: Price uniformity and price volatility. While this support may take one of several forms. but to competitors. in an attempt to gain market share.

Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. A review of historical retail pump prices in the Halifax. is beyond this study’s scope. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. the petroleum marketing sector has been the subject of several inquiries at federal. resulting in 9 convictions. control over retail pump price effectively reverts to the supplier. These cases have largely involved local dealers and/or isolated incidents. 1997 MJ ERVIN & ASSOCIATES 22 . Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. Following a year-long investigation. but reverts back to the dealer when the support arrangement is ceased. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers.Under the provisions of some price support mechanisms. the Bureau found that there was no evidence to support these allegations1. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. In addition. While this study does not intend to undertake a detailed review of the effect of the Act. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. which is administered by the federal Competition Bureau (Industry Canada). and a brief discussion of this case appears in part D. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. In addition. More recently. provincial and even municipal levels. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. however. There are few current examples of direct government intervention in the pricing of petroleum products. An examination of the effect of the Competition Act. or of direct government intervention in marketing. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act.

as outlined above. to some degree. in the form of standards for the decommissioning of retail petroleum sites. So defined. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. A practice. Many smaller retail owner-operators. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. accounting for roughly 88% of all gasoline demand. or inhibiting. particularly in smaller population centres. and is the single largest market for gasoline products. creates an obstacle to. This issue is discussed more fully in part D. These regulations clearly exist to the benefit of all. a competitive climate. The high cost of building a modern retail gasoline outlet for example. As a product group however.500 retail gasoline outlets across Canada. Conversely. exit from an non-viable market. Retail gasoline sales. it is the single largest one. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. it is clear that government policy plays an important role in facilitating. one can cite examples of regulatory obstacles to exit from the retail gasoline market. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). that is. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. inhibit competition. is in part. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. accounts for about 37% of all refined petroleum demand in Canada. sales of gasoline through the roughly 16. or incentive for. accounting for 41% of all petroleum demand. entry into an attractive market. for safety and environmental protection. or incentive for. creating a need for higher margins. higher pump prices. promotes or limits market-driven pump prices. and consequently. and at least some of this capital cost is regulatory compliance-driven. MJ ERVIN & ASSOCIATES 23 . It is important to acknowledge that many regulations affecting the retail gasoline industry.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. but exist to meet other important societal needs.

452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6.9% PetroChem Feedstocks 5. This study provides an estimate of the actual retail outlet population.7% Light/Heavy FuelOils 14.9% Diesel Fuel 22. This survey accounts only for major established retail networks .7% Lube/Grease 1.6% Other Gasoline 4. nor is there any federal or uniform provincial enumeration of retail gasoline outlets. Figure 5: Canadian Retail Outlet Population .2% Asphalt/Coke 4.2% Other 0.it has no practical means to enumerate each and every outlet.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 .3% Total Sales Volume: 84. as shown in Figure 5.2% Retail Gasoline 37.2% Propane /Butane 2.

as owner of the product. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . The supplier. exist between retail dealers and their suppliers. There are two main stakeholders involved in the marketing of retail gasoline: the supplier. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode.000 outlets in 1989. and the dealer. and this is of some importance with respect to the matter of prices and competition in this sector. using Octane counts only) is roughly equivalent to population densities. The principal dealer and attendants are salaried employees of the supplier. the retail outlet is owned and operated entirely by the product supplier. Distribution of these outlets by province (Figure 6.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. to about 16. or modes. Several possible relationships. who manages the day-to-day operations at the retail outlet. and usually owns the brand name seen at the retail outlet.500 in 1995. who holds initial title to the refined petroleum as it leaves the rack point.The estimated number of retail outlets in Canada has declined from 22. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. and all inventory and revenues belong to the supplier. as one might expect. controls the setting of the pump price.

the entire gross product margin accrues to the brand supplier. supplier salary from supplier. the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 . Control of Pump Price Dealer Compensation supplier a commission from the supplier. but the outlet operator (“dealer”) is compensated by a commission payment. who pays all outlet operating costs. the supplier retains control of the retail pump price. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. usually based on cents per litre of petroleum sales. the outlet facilities and petroleum inventory is owned by the supplier. based on pump sales volume.sub-component margins . an employee of the supplier supplier supplier typically the dealer. The dealer in turn hires attendants. The “dealer” is in essence. Since the supplier owns the petroleum product at this type of outlet. and pays them from his commission revenue.

The margin between these two prices is the dealer’s gross revenue. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. since it is predicated on contractual arrangements between the dealer and the supplier. can vary considerably from one supplier to another. unlike rack or pump prices.product from the supplier at a “Dealer Wholesale” price. dealer-established retail price. and in turn resells to the motorist consumer at a higher pump price established by the lessee. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. This dealer margin is defined as the pump price (ex-tax). and sells at the posted pump price. The dealer pays most or all of the expenses associated with operating the outlet. This Dealer Price. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. The margin between these two prices is the dealer’s gross revenue. and sells at the posted pump price. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. less the Dealer (wholesale) Price charged by the brand supplier. not the supplier. and means of compensation supplier. MJ ERVIN & ASSOCIATES 27 . and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. the retail facilities are owned by the dealer. and has control over the retail pump price. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition.

Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. who themselves establish pump prices. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. In addition. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. and fully two-thirds operate as lessees or independents. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. MJ ERVIN & ASSOCIATES 28 . virtually none of the major integrated outlets are company operated. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. The remainder represent one of over 50 different marketer organizations. Petro-Canada.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. or Imperial Oil). some general figures are mentioned here. during a price war) as previously described. 1 Unless the dealer is under a price support arrangement (for instance. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace.

Improved outlet revenue from ancillary operations has caused. has had a profound effect on the retail gasoline marketing sector. Based on a sampling of outlets surveyed in this study. Many outlets have more than one ancillary offering: many “flagship” outlets for example. average annual throughputs ranged from under 1 million litres in smaller population centres. which in part has led to a reduction in retail product margins. ancillary service has had the consequence of subsidizing the pump price of gasoline. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline.5 million litres. Most ancillary services are operated by the dealer/lessee. more fully described in part C. reduced petroleum margins. In effect.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing.While an average outlet throughput may be in the order of 2. In fact. Canadian throughputs have dramatically improved in the past several years . Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. feature both a large-area convenience food store and a modern car wash facility. These improved outlet throughputs have provided for improved petroleum revenue potential. to over five million litres in major markets such as Toronto. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. these study findings show that this can vary widely from market to market. and is a result of. Figure 8 depicts the Canadian representation of several key ancillary services.

when the Persian Gulf War caused crude prices to increase significantly. prices are for regular unleaded (RUL) gasoline. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. An “all markets” average. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. Regional and market-to-market comparisons are presented in greater detail in part D. as can be seen in part D of this study. Unless noted. MJ ERVIN & ASSOCIATES 30 . an examination of the specific historical record of gasoline prices is useful. using a Canada 10city weighted (by provincial demand) average. would be somewhat higher. Since rising prices are common to most consumer goods and services. While some of the presented findings are selfexplanatory. particularly around 1990. Since 1 Data is not regularly collected on smaller markets. and with which the reader should be familiar. As such.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. many utilize terms which are explained in part A. the “Canada average” price reflects an average of urban markets only1. including smaller markets. This shows that pump prices have increased in nominal terms. This part examines broad trends in several areas. mainly using Canada average values. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising.

Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. When compared to other consumer goods. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). MJ ERVIN & ASSOCIATES 31 . Figure 10: CPI Index Comparison . and relative crude cost. nominal pump prices decreased. as defined in part A of this study. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. ex-tax equivalent prices. retail pump prices were about 7 cents less in 1995 than they were in 1986. rack price. In constant dollars. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. It also depicts the associated margins. and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. as in Figure 10. When pump prices are reduced by the amount of tax content.1990.

Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. as shown in Figure 12. as might be suggested. the downstream industry operates on a “cost-plus” basis. as the next section shows. and in fact have displayed a declining trend over the past six years. MJ ERVIN & ASSOCIATES 32 . and have risen slightly since 1994. and the rise in the tax content. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. Figure 12 shows that industry margins have not been constant over time. that is. which are defined by the price points. it is also useful to examine the behavior of margins. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. as Figure 11 shows. it simply passes on a fixed cost margin to determine the “correct” pump price. the presence of these additional market factors have operated to the benefit of consumers. If. In fact. are principally a reflection of changes in the underlying price of crude oil. then one might expect margins to be quite constant over time. Margin History While Figure 11 provides an indication of key price trends. It is important to state that pump price changes do not occur in exact lock-step with rack prices. due to additional market factors which affect pump and rack prices at any given point in time. nor do rack prices exactly follow crude costs. which in turn. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products.

several factors. MJ ERVIN & ASSOCIATES 33 . including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. The decline in refiner and marketing margins has both resulted in. compared to the Canadian average. which have both shown a consistent decline throughout the period 1991 to 1996. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. as local competitive factors act to self-regulate pump prices. In particular. the gross marketing margin can fluctuate quite significantly1. not weekly or daily data. 1 In fact. and has been a result of. A more thorough discussion of specific market factors for these and other centres appears in part D. the actual fluctuation is much more pronounced than shown.crude) 5¢ Marketing Margin (retail . since the chart is based on monthly averages. Finding 13: From 1991 to 1996.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. this upward trend is not attributable to “downstream” refiner or marketing sector margins. This shows that on a monthly basis.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs.

A comparison of Canadian and US regular gasoline pump prices. resulting in significantly higher Canadian gasoline prices. with and without tax. if not all of the difference in pump prices between Canada and the US. for several years. this is wholly attributable to the difference in taxation. This difference accounts for most.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. US pump prices.Figure 13: Monthly Gross Marketing Margins. US Price History The retail gasoline tax structure in Canada is vastly different than the US. This shows that. although Canadian pump prices in urban markets are clearly higher than in the US. Canadian pump prices have been roughly equal to. is presented in Figure 14. On an ex-tax basis. or even less than. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 .

Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. While these trends have also occurred in the US. • Although this study shows that on an ex-tax basis. This is no longer the case however. when compared on an ex-tax basis. which is reflected in US average pump prices. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . Canadian outlet throughputs (although likely still less than those of the US). Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. trading at any given time within a relatively narrow (about 2 cents per litre) range. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. RFG has not been introduced to Canadian markets. largely as a result of two factors: • Canadian marketing margins have decreased in this period. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. Figure 15 compares these values for selected Canadian and US centres over a period of several years. and moving up or down more or less in unison. both a cause and an effect of improved throughputs and ancillary revenues as previously described. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. have improved considerably. Canadian ex-tax pump prices were historically somewhat higher than in the US. From this it can be seen that Canadian and US rack prices. Prior to 1994. page 24) and somewhat increased demand. This would be a useful area for further research. as a result of outlet closures (see Figure 5. behave in a very similar fashion.

000 24¢ 1. Demand vs.500. increasing significantly every spring. and as would be expected in any commodities market under these conditions. compared to average ex-tax regular gasoline pump price for the same period.900. not only in a given market.000 1.700.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets.500.000 1. Gasoline price exhibits a similar. As non-refiner marketers attempt to secure a supply of this diminishing inventory. and falling in the latter half of each year.700. or sales. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense). Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”. conditions begin to favour a “seller’s market”. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America.000 2. but in fact across the North American continent (US demand follows a similar pattern). This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories. rising and falling closely in step with demand. Yet in the latter half of each year.300. Price History Figure 16 shows the history of Canadian gasoline demand. of motor gasolines from 1991 to 1996. Pump Price (nominal ¢/litre) 3. albeit less distinct pattern.000 34¢ 2. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 . a “buyers market” develops. as demand ebbs and inventory improves. Simply put.900. or indeed anywhere. the price tends to be bid upwards.100.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg.000 2.100.000 2. and prices tend to fall.000 2. Figure 16: Monthly Demand vs. Gasoline demand exhibits a very regular seasonal pattern.

This part of the study presented a number of historical views of retail gasoline prices. and product taxes which add to the consumer price of gasoline. despite a rise in demand. while average ex-tax pump price declined by 14% (since 1994. which consists of the refiners and marketers of gasoline and other petroleum products. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. competing to meet their own needs. so do prices. their related product costs and margins. The traditional supply-demand model predicts that when demand rises. pump prices have increased due to a significant rise in crude costs in this period). On a long-term basis however. in that prices have fallen. demand rose approximately 8. a feature of most marketregulated commerce. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. gasoline prices have not followed the traditional model. Figure 16 shows that from 1991 to 1995. All of the findings suggest that. MJ ERVIN & ASSOCIATES 37 .3%. while world crude prices and Canadian taxes have generally increased over the past several years.Whether in the spring or the fall. the essence of a free market economy. as evidenced by declining industry margins. has operated in a highly competitive environment. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. This is of course. the downstream petroleum industry. which ensures a competitive product price for buyer and seller alike. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market.

Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them.. outlet volumes. These “outside factors” tend to obscure the more relevant aspect of pump price. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. play a role in a market’s pump price. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. and a more detailed examination of price. ancillary revenues. there is no regular monitoring of pump prices in smaller centres. Nineteen markets were therefore adopted for the study (Table 3). namely product margin. A number of factors such as taxes. • Methodology Selection of Markets A number of markets were selected for the study. etc. outlet costs. is useful in providing broad overviews of industry price and margin trends. and in order to provide insights into the range of competitive dynamics that may exist. and pump prices alone provide very little opportunity for “comparability”. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. freight. MJ ERVIN & ASSOCIATES 38 . although one was subsequently dropped due to insufficient submitted data.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C.

In all. but a number of variables. Furthermore. To examine the competitiveness of the marketing. or “rack to retail” sector. it was essential to obtain data not normally available through existing public sources.Each market was classified according to regional affiliation (BC/Prairie. Shell Canada. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. and Canadian Tire Petroleum. retail pump prices . Five companies responded to this request: Imperial Oil. In addition. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets.. retail outlet and brand representation. the gross marketing 1 Although White Rock is clearly not a major centre by itself. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences.0001. Petro-Canada. To this end. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. MJ ERVIN & ASSOCIATES 39 .are influenced not by one. the gross marketing margin must be examined in isolation from those other variables. price history data not available through public sources. Ontario. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. and Group B markets less than 500. Suncor Inc. and for smaller markets.and consequently competitiveness . 2 Depending upon the outlet mode. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet.000. Process Overview As illustrated in part A. these organizations provided market-level data on freight costs.

and the final “rationalized” gross product margin was determined for each market. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. Group B (smaller market) and 19-market study averages. to arrive at “blended” values2. average outlet annual throughput was determined for each market. Where differences in gross product margin might still exist. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. including some smaller centres. 2. Where applicable. The variables of tax content. MJ ERVIN & ASSOCIATES 40 . this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. Using the derived gross product margins and volumes for each market. tax content. as the “blended” price includes other product grades. rack price. For each market. these were weighted by volume. and freight. by product grade. 1 Although outlet cost and ancillary revenue data was not available for all markets. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. The gross product margin thus serves as an interim basis for comparing study markets. in addition to operating cost and ancillary revenue data gathered in the study1. rack price. 2 Accordingly. 3. a market-by-market profile of outlet income is presented. From participant company supplied data. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). average pump prices are higher than actual average regular gasoline prices. and freight were successively removed from the pump price. This allows for an accurate determination of net outlet revenue.margin is stripped of its freight component. Finally. weighted by sales demand. to derive the 1995 average gross product margin for each of the study markets. a broad representation of markets was possible. 1995 average values were determined for pump price.

product margins. 6.. perhaps by 1 to 2 cents per litre. While clear.7 million. 7. average revenues from ancillary services were added. but they are relatively minor. MJ ERVIN & ASSOCIATES 41 . Supplier Overhead costs. represent a broad range of markets. Wholesale refined product prices used in this study are therefore likely to be overstated. This value was then applied to the gross product margin to determine average outlet petroleum revenue. 5. Interpretation of Data In some smaller centres. as described on page 10. marketing margin.4. the effect on the “blended price” is small. In referring to marketing margins. freight. These differentials do vary from one market to another. and supplier profit. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. objective data exist for both of these values.to determine average consolidated net revenue per outlet. and from one brand to another.. Bloomberg rack price values were used as the assumed wholesale price. This variation is constant across all nineteen markets however. grade differentials were based on known differentials of nearby markets.. A dollar-per-outlet estimate of these elements was made. From participant company data. Also. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. . Unlike retail pump prices however. The derived weighted average values of pump price. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. also considering that RUL constitutes the majority of product. it is important to understand that the use of rack price in this analysis has certain implications. etc. including relatively smaller ones such as Sioux Lookout or Gaspé. petroleum revenues.. and gross product margins are therefore likely to be understated. a recognized source of data on world crude oil and petroleum markets and prices. many wholesale petroleum purchases are made at less than the “posted” rack price.. so that on a cents-per-litre basis. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. or consolidated net incomes. accurate comparisons are possible. When these margins are applied to outlet throughputs as in step 4 above. and accordingly represent a broad spectrum of consumers and marketers. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. and therefore where assumptions were made. these 19 markets represent a combined population base of 8. and outlet operating costs were deducted from total revenue. encompassing a significant portion of the entire Canadian market.

independently gathered data. table J for an explanation of how variance is derived. and based on objective. The data also shows that typically. A 6. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however.64 cents per litre in pump price. The data shows a statistical pump price variance of over 17 cents per litre within this study group. broken into tax and extax components. The first of these variables to be examined is tax. there is little to suggest why such a high variance exists. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. The study data suggests that variations in tax rates account for a significant part of pump price differences. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist.38 cents per litre in ex-tax pump price. but a variance of only 12. accurate.Rack prices used in this study are nevertheless market-driven. MJ ERVIN & ASSOCIATES 42 . Tax Figure 19 shows posted pump prices for the study markets. The 19-market study group exhibited a statistical variance1 of 17.8 cent difference in pump price 1 See footnote at Appendix II. while lower prices tended to prevail in major centres. higher priced markets are associated with smaller population centres. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices.

MJ ERVIN & ASSOCIATES 43 . the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. taxes were a significant element of pump price. while taxation between provinces is more pronounced . This eliminates any effect that tax variability may have. Figure 19: Pump Price . The data shows that taxation between markets within the same province varies little. In all study markets.tax. or when examining historical price trends. as described in part A. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. but the variance is minimal . additional elements of the revenue stream must be further isolated.between Calgary and Vancouver for example. Montreal).while all markets are subject to the same rate of federal excise tax and GST1. accounting for roughly half of the average retail price. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. namely the upstream industry and refiner sector. thus providing a better basis for comparison.75 cents per litre (Vancouver. was less than three cents. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. it is therefore more useful to use ex-tax pump prices when comparing any two markets. Upstream and Gross Refiner Margins Although the deduction of tax content is useful. GST content can vary by market. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. 1 Due to pump price differences.less than one-half cent per litre. when examined on an ex-tax basis. provincial tax rates can vary greatly.

reflecting the reality that at the rack level of competition. MJ ERVIN & ASSOCIATES Cents per litre 44 . and therefore are best analyzed separately.assuming transport costs did not outweigh the price difference. the rack price is equivalent to the upstream margin plus the refiner’s margin. rack price) and gross marketing margin elements. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. reflecting some differences in refinery crude acquisition costs. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. Freight costs are additional. differ little from those of major centres. one region cannot maintain rack prices at a higher level than another. it should be restated that each of these sectors. but ultimately. as this would cause rack buyers to bring product in from the lower-priced region . the rack price is set at the rack point (Winnipeg. as is examined below. To address this. the validity of analyzing gross marketing margins in isolation might be raised. and their respective margins. When rack price is deducted from the ex-tax pump price. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. This is due to the fact that for any market. if a clear understanding is to be achieved. are clearly delineated by market-driven crude. in the case of Thompson). Furthermore. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. rack and pump prices.

with their component freight costs. the data shows that freight is often a significant part of the gross marketing margin. Two of the study markets had freight costs in excess of 3. as low as 0. one final outside variable must be isolated: that of product freight. in fact. For markets which are also established as rack points. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. MJ ERVIN & ASSOCIATES 45 . generally smaller markets. and therefore a significant pump price factor.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. this freight cost is almost negligible.16 cents per litre (gross marketing margin) to 7. Figure 21 shows a study market comparison of gross marketing margins. particularly in comparisons of major urban markets to small. For other.0 cents per litre. it is essentially a “non-core” business. Before using this as an analytical tool however. it is therefore important to eliminate the freight variable from the gross marketing margin. remote population centres. resulting in comparative gross product margins.49 cents per litre (gross product margin). It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply.3 cents per litre. To provide a comparative view of the marketing dynamics within the study group. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13. Although freight operations are often an integral part of many petroleum marketing operations. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences.

or between any two regions. or consolidated net incomes.5 cent per litre average relates to regular gasoline in major markets.5 cent variance in gross product margin is still significant however.68 cents per litre1. In referring to marketing margins. For all study markets.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market. to the resultant retail gross product margin . A 7.6 cents) to the variance in their component gross product margins (7.42 cents per litre. product margins.5 cents). whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets.95 cents per litre. Bloomberg rack price values were used as the assumed wholesale price. petroleum revenues.5 cents per litre average Gross Product Margin cited in Part B.17 cents per litre. was the lowest. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3.06 cents per litre. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17. The study revealed that: • • Retail gross product margins differ very little between major urban markets . Gaspé. while Toronto. at 3. while Group B markets averaged 7. 1995 gross product margin averaged 5. at 14. was the highest of the study group.a variance of only 2.68 cents per litre.6. MJ ERVIN & ASSOCIATES 46 .22 cents per litre Smaller markets showed a wider variance in gross product margin .the gross revenue available to the petroleum marketing sector for its operations. as the 3. Group A (larger population) markets averaged 5.

To understand why such a wide range of margins can exist after eliminating all tax and freight variables.000 2.differences between markets.2 cents per litre in Gaspé. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow. If these two factors are related to each other as they are in Figure 24.000. an examination of related outlet throughput volumes is necessary.000. Indeed.000.000. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 .000 1.000. vs. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group. once isolating retail gross product margin from all of the “outside” pump price factors. a wide range of variability still exists between markets in the study group . for example.000 litres per year (Sioux Lookout) to over 5. it would likely be so unprofitable as to be un-viable.1 cents per litre in Toronto.000 4. sold significantly less than 5 million litres of petroleum per year.000.000 Litres 3.000 litres per year (Toronto). if any retail gasoline outlet located in the Toronto area for example. A wide range of volume performance is evident. 3. ranging from under 700. Figure 23: Average Annual Throughput per Outlet 6.000.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that.14.000 5.

a low volume outlet would be much less profitable than one in the same market with significantly higher volumes.962 R2 = 0.000.000 Volume (litres) 4. not of poor competition. If all outlets in a given market experience generally low throughputs.6624 1.6634Ln(x) + 76.Figure 24: Outlet Volume vs. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.000 5.000.4 million litres annually.000.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet. the Group A market outlets had roughly 50% more throughput than Group B outlets . On average however.000 2.000 3.95 cents).000. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes. Ontario. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5.that is. Regionally.000. compared to 2. while those with high Gross Product Margins tend to have low outlet throughputs. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput. With few exceptions. Although MJ ERVIN & ASSOCIATES 48 .7 million respectively. Smaller markets perform as competitively as larger centres. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput. they remain essentially the same regardless of volume changes .42 cents) than smaller (Group B) population centres (7. As most outlet operating cost are fixed in nature . and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.000. it follows that higher gross product margins will be the consequence.000 6. all market groups (BC/Prairie.

and ultimately shows that very little difference in competitiveness exists between any two markets. Ancillary revenues are those derived from non-petroleum sales sources. and the resultant consolidated net revenue.000. and incur many expenses in the course of their commerce. competitiveness occurs between retail outlets. which.000 4. and supplier MJ ERVIN & ASSOCIATES 49 .the revenue available for dealer income. Figure 26 summarizes total outlet petroleum sales. Figure 25: Outlet / Volume Relationship . in addition to petroleum sales.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1.000. this is likely due to the higher incidence of Group B study markets within this region. however.000 3. while operating costs are those costs which are directly incurred in the operation of the retail facility.716 . These additional factors clearly have an effect on the relative competitiveness of retail markets.000 2.000 6. less outlet costs. as described below.000 5. Consolidated Net Revenue per Outlet To create a complete.000. car wash. and must be examined. In reality. It represents the residual revenue which is available to the dealer and to the supplier.000. is only a measure of petroleum revenue per litre. such as convenience stores.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. which for the study group.000. outlet-based view of retail markets. product cost. supplier overhead costs. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). averaged $69. ancillary sales. supplement their incomes with other revenues. Gross product margin. and auto service. two additional factors are introduced: ancillary revenue and outlet operating costs.000.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions.

which reflects his investment in the outlet.000) $(200.000) $(150. Income BC/PR $300.profits. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets. A discussion of the ultimate distribution of this revenue is useful. reduced pump prices.000 $250. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer. causing the weighted average for Quebec / Atlantic to be depressed).$154. as explained below.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. Finding 19: Based on published rack prices.000 $50. An examination of these component elements reveals a significant finding: that for most markets. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier. Figure 26: Outlet Revenues.000 per year respectively .000 $200. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations. MJ ERVIN & ASSOCIATES 50 . Costs.000 $150. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied. As described above.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist.Group B outlets were not as profitable as these revenue values might suggest.000) $(300.000 vs. and his personal labour investment. In effect. $60.000) $(100. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue.000 $100. Table K). these ancillary operations contributed to a lower product margin and consequently. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets .000) $(350. Most markets showed relatively similar net revenues (see Appendix II.000) $(250.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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Vancouver provides several perspectives into retail marketing. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs. while average throughput ranked 4th. Vancouver is also a terminal for a refined products pipeline from Edmonton. net outlet revenues were less than those of other major centres. Geographic / Supply / Freight cost considerations: As a port city.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. contributing to a higher than average pump price. Figure 28: Vancouver . but well within a cluster of markets with similar throughputs. This may explain the somewhat elevated gross product margin in this market. a 60. and also has local refining capacity.542. The somewhat high margin placed this market slightly above.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price .98 ¢ 0.658.000 barrel per day plant located in the greater Vancouver area. Low consolidated net revenues may have contributed to the higher margin.38 ¢ 7. Vancouver collects a 4 cent per litre municipal tax. ranking 11th. and with access to wholesale product by several means.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 .Vancouver population # of brands # of outlets outlets per 10. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. as described below. Overall. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market.ex tax Canada Average .745 18 446 2. Influence of other markets: Although relatively close to the US border.000 1. this market has access to numerous refiners along the Pacific coast through marine supply.968 litres 7.

but less than most markets with a small population base. Consolidated net revenue: No Ancillary or outlet cost data was available for this market.630 litres 7. Geographic / Supply / Freight cost considerations:. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip. prices.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. White Rock is essentially part of a major market due to its proximity to Vancouver. Vancouver. or competitive dynamics.604. This suggests that. Price history / Taxation: Although no specific data is available. Like Vancouver. the study data found little to suggest a material effect upon representation. at least in this market.000 16. the White Rock retail gasoline market displayed the same attributes as a major urban market.315 4 8 4.45 ¢ 7. MJ ERVIN & ASSOCIATES 55 .White Rock population # of brands # of outlets outlets per 10. Freight costs were accordingly low compared to other small markets in this study. and retail gross product margin was less than that of markets with a similar population base. This is likely due to the fact that unlike many smaller markets. due to its proximity to one. Despite its relatively small size. Average outlet throughputs were relatively high. White Rock’s margin was typical of markets with similar outlet throughputs. Influence of other markets: Although this market is a border-crossing community.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. thus providing some unique characteristics for the market study. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver. adjacent to the United States border. This market is close to its usual rack point. this market is subject to a 4 cent per litre municipal tax. gasoline “cross-border shopping” is less pronounced than might be expected. prices in this market have historically mirrored those of Vancouver. In all respects.98 ¢ 0. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors.

Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market. Figure 29: Calgary . indicative of a strong competitive climate.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 . pump prices in this market have historically been well below the Canadian 10-city average. Other considerations: Of the markets studied.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price. Calgary is of sufficient size to support a viable rack market. Indeed.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . Calgary had the third highest number of retail brands.24 ¢ 6. Rack-to-outlet freight costs are among the lowest in the study group.719 litres 6. Some smaller markets in the vicinity have occasionally priced below Calgary. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics. Influence of other markets: Calgary is fairly remote from US and other major markets.ex tax Canada Average .47 ¢ 0. which was one reason for selecting Calgary as a study market.675 27 313 4. creating some competitive pressures (see Nanton).827. Product is usually sourced from Edmonton refineries via pipeline. Calgary pump prices are very close to the Canadian average.Calgary population # of brands # of outlets outlets per 10.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Consolidated net revenue: was typical of other major markets in the study group.000 710. Price history / Taxation: As the figure below shows.

this market is removed from other significant markets. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group. and a history of volatile pump prices. Ex-tax prices are also above average. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. Influence of other markets: Like Calgary. and is therefore a recognized rack pricing point. Figure 30: Regina .ex tax Canada Average . which are among the highest in Canada.50 ¢ 0. and this market is now more typical of other large population centres. Since 1993. Regina was of some interest as a study market.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . Since then. supply/demand is likely more balanced. Consolidated net revenue: was typical of other similar markets. price volatility has eased. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity.089. Although no supporting data is available. This is partly due to provincial taxation levels. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets. and therefore experiences no particular influences from any other major market.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price .000 179. margins and throughputs were typical of other markets with a similar population base. Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.794 litres 7.21 ¢ 7. it is likely that this reflected a surplus of wholesale inventory within the local market or region.180 15 86 4.Regina population # of brands # of outlets outlets per 10. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average.

and therefore experiences no particular influences from any other major market. Price history / Taxation: In the early 1990’s this market experienced some price war activity.217 litres 8.22 ¢ 7.265.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 .06 ¢ 0.Winnipeg population # of brands # of outlets outlets per 10. this market has exhibited relatively stable pricing.790 17 261 4. Influence of other markets: Like Calgary. it is an established rack price point. though somewhat higher than average ex-tax pump prices. although there is no study data to support this.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. this market is removed from other significant markets.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. possibly due to modest ancillary revenue. prices have tended to stay somewhat above the Canadian average. and has remained very close to the Canadian 10-city average. like most markets of this population density. Figure 31: Winnipeg . Since then. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . although.000 616. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market. On an ex-tax basis. Consolidated net revenue: No ancillary or outlet cost data was available for this market. probably related to a regional surplus of wholesale inventory (see Regina). This may reflect a lower than average Consolidated Net Income.ex tax Canada Average .

this market has a relatively low freight overhead.Nanton. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group. Average outlet throughputs were relatively low. Nanton appeared to benchmark its pump prices to those of Calgary. placing Nanton well below the expected margin. while others experience consistently high prices.071.far in excess of what would be expected of a community with a population of 1. and perhaps healthy ancillary sales associated with highway traffic.and a low average outlet throughput. Consolidated net revenue: No Ancillary or cost data was available.the highest of the entire group . Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market . situated on a major North-South highway to the United States Among the study group. MJ ERVIN & ASSOCIATES 59 . a feature not available to other. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. While these conditions would normally result in a high gross product margin. due to its proximity to one. as Figure 24 shows. In this respect.91 ¢ 0.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary.41 ¢ 5. in order to maintain a share of the considerable potential sales revenue that passes through this market. Influence of other markets:.600. it is likely that low operating costs. Despite its small size. Nanton was perhaps the least viable market in the study group. more isolated small-town markets. Due to its highway location and its proximity to Calgary. Price history / Taxation: In order to attract market share beyond simply the local population. Alberta population # of brands # of outlets outlets per 10. would have an offsetting effect. in terms of expected petroleum revenues. although not as low as expected.000 litres 5.585 4 5 31. Nanton was the smallest market in terms of population. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable. the Nanton retail gasoline market displayed the same price attributes as a major urban market. the retail gasoline market in Nanton was not restricted to the local population.000 1. Unlike many of the smaller markets in this study group.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Nanton had the second lowest gross product margin of the study group. Nanton has traditionally priced either at or below Calgary. Nanton had a high number of per capita outlets .

Influence of other markets: Since it is not located on a major inter-urban thoroughfare. other markets. Alberta population # of brands # of outlets outlets per 10. and in fact fell into a tight cluster of four other study markets.6 ¢ 10. Peace River also experiences high freight costs. this market has little or no influence upon. Peace River has among the highest freight cost in the study group.45 ¢ 1.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply.6 cents per litre.623 litres 12. they were comparable to other markets with similar average throughputs. Supply is via tanker truck from Edmonton. though fairly typical of many smaller. high pump prices. the community of Peace River is subjected to a number of factors which give rise to higher than average prices. and due to its isolated locale in northern Alberta. further adding to overall high pump prices. its normal rack point. nor is it influenced by.715 6 8 11. isolated markets. MJ ERVIN & ASSOCIATES 60 .Peace River. Price history / Taxation: Peace River is typical of small.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.000 6. In contrast to Nanton. and was accordingly chosen as a study market. experiencing relatively high gross product margin and consequently. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. isolated markets.157. Geographic / Supply / Freight cost considerations: At 1.

This however. further adding to overall high pump prices. a significant portion of which would likely be distributed towards supplier overhead costs. they were comparable to other markets with similar average throughputs. Thompson is faced with the dilemma. Supply is via tanker truck from Winnipeg. high pump prices. Price history / Taxation: Thompson was typical of small. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. remote market. These factors resulted in relatively strong per-outlet net revenues. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high.000 14. thereby creating the potential for narrower margins. It also experienced high freight costs. MJ ERVIN & ASSOCIATES 61 . outlet costs were also modest typical of most smaller markets.975 5 6 4. and in fact fell into a tight cluster of four other study markets. Although ancillary revenues were the smallest of the study group. experiencing relatively high gross product margin and consequently.02 ¢ 11.520 litres 14. Thompson is among the highest freight costs in the study group. this market has little or no influence upon. Consolidated net revenue: Low outlet throughputs were offset by higher margins. nor is it influenced by. Geographic / Supply / Freight cost considerations: At 3.014. resulting in per-outlet petroleum revenues which were quite typical of many markets.02 cents per litre. Other considerations: Like other small markets. and reduced pump prices. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.Thompson. the community of Thompson clearly falls into the category of a small. Influence of other markets: Since is not located on a major inter-uban thoroughfare. and due to its isolated locale in northern Manitoba. other markets. Although outlets in Thompson appear to be as competitive as those of any other study market. isolated markets. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. Manitoba population # of brands # of outlets outlets per 10.1 ¢ 3. its usual rack point.

In addition.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5. Influence of other markets: This market is continuously linked with several other major retail markets. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. Figure 32: Toronto . as evidenced by an exceptionally low gross product margin. least number of outlets per capita.098.06 cents per litre.3 ¢ 3. Consolidated net revenue: Although no study data was available for this market.775 30 546 2.06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group. and is also relatively close to wholesale supply sources in the US.36 ¢ 0.000 2. it is likely that outlet ancillary revenues are among the highest in the country. and first in average throughput per outlet. thus there exists a climate of robust competition. New York. this market was consistently less than the 10-city average. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. Within this region are thousands of retail outlets. With an average “blended” gross product margin of only 3.275. similar to that of Montreal. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput. this market ranked first in a number of measures: lowest gross product margin. it had the second highest brand variety of the study group. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. This is likely offset by high operating costs. It consequently has a low freight component. and a resultant low consolidated net revenue.Toronto population # of brands # of outlets outlets per 10. stretching from Pickering to Buffalo. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. On an ex-tax basis however.478 litres 3.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average .extax Toronto Posted Price .ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 .

948 litres 5.000 678. in fact. Other considerations: While pump prices in this market were somewhat higher than in Toronto.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin.ex tax Canada Average . Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis.Ottawa population # of brands # of outlets outlets per 10. exhibiting all of the characteristics of robust competition. freight costs within this market were quite low.145 19 209 3. Influence of other markets: Although Ottawa is the only major market in the immediate area.004. and operating costs were higher than most.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price .68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point. slightly lower that expected. Figure 33: Ottawa . Consolidated net revenue: was low. and close to the Canadian 10-city average. Although petroleum revenues were typical of major markets.29 ¢ 5. some of which have on occasion priced below Ottawa (see Nanton and Calgary). rural markets co-exist in this area. several smaller. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. ancillary revenue was slightly lower than average.97 ¢ 0.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4.

MJ ERVIN & ASSOCIATES 64 . yet with some potential for cross-border retail competition. this Canadian market has some difficulty in remaining both competitive and viable.73 ¢ 1. a consequence of the transport distance from the rack point. a product of relatively strong net petroleum revenues combined with lower than average operating costs. somewhat isolated. and accordingly. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput.550 litres 8. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto).000 81. Sault Ste Marie is a sizable market. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point.Sault Ste Marie population # of brands # of outlets outlets per 10.22 ¢ 7. Influence of other markets: This market is close to a US border market. partly due to higher freight costs. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. and between 5 to 8 cent per litre in gross product margin.465. Pump prices in this market were thus typical of any market with similar throughput characteristics. average throughputs were modest.475 10 24 2.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply. This would suggest that a significant market share is being lost across the US border.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group. Freight costs are therefore high.

Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. despite its high prices.000 3. Freight costs are therefore high. one-seventh the average throughput in Toronto. This would suggest that.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group.2 ¢ 11. Influence of other markets: This is clearly an isolated market. and outlet throughputs of any market studied. largely due to higher freight costs. with little or no influence from other retail gasoline markets. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets.310 3 3 9.066 litres 14. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. although high. Consolidated net revenue: No data was available for this market.006 litres in 1995.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. in fact the second highest in the study group. this market experiences a high degree of price competition. so that virtually all sales volume represents local demand only.Sioux Lookout population # of brands # of outlets outlets per 10.96 ¢ 3. MJ ERVIN & ASSOCIATES 65 . This is a major factor in the high cost of gasoline in this market. was much less than expected for a market of this size. Sioux Lookout is well-removed from any major highway. and had the least number of outlets. It therefore presents some unique characteristics for the market study. An average outlet in Sioux Lookout pumped only 694. brands.

with resultant low average outlet throughputs. On an ex-tax basis however. Price history / Taxation: As the figure shows. With 32 competing brands. This market had the highest tax content of the study group due to high provincial tax rates (in 1996.5 cents per litre was introduced into the Montreal area). Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. Montreal was included in the selected market study. a function of a competitive rack market and an excess of retail outlets competing for market share. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes. It therefore represents a highly competitive rack market. and is also relatively close to wholesale supply sources in the US.Montreal population # of brands # of outlets outlets per 10.3 ¢ 5.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.000 1. placed Montreal lowest of all study markets in terms of consolidated net revenue.775. Influence of other markets: Like Toronto. this market interacts with several other markets in the region. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity. thus promoting a competitive climate.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region.394. combined with low petroleum revenues and high operating costs.extax Montreal Posted Price . Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets. this market ranks first of the study group in terms of brand variety.144 litres 5. pump prices in this market have a tendency to be volatile. Figure 34: Montreal .Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average .870 32 866 4. This. pump prices in Montreal have generally been at or below the 10-city average for major markets.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . an additional tax of 1.43 ¢ 0.

yet is geographically quite isolated. Gross product margin was accordingly high. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base.Chicoutimi population # of brands # of outlets outlets per 10.250. MJ ERVIN & ASSOCIATES 67 . but as the figure shows. In the case of Chicoutimi.000 120. Consolidated net revenue: was average among the study group. this market has little potential as a rack market. this amounted to a reduction of 5. although low. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. Margin/Throughput relationship (Figure 24): Outlet throughputs. for example).605 14 97 8. by tank truck. Nevertheless.08 ¢ 11. a partial factor in the high cost of gasoline in this market. both pump and ex-tax prices in this market were higher than average.289 litres 12.75 cents per litre. were quite typical of markets with similar populations. Freight costs are therefore somewhat high.28 ¢ 1. within a cluster of other markets with similar attributes. Chicoutimi is normally supplied from the Quebec city rack.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John. but is quite isolated from any other markets.

MJ ERVIN & ASSOCIATES 68 . Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. so that virtually all sales volume represents local demand only. Consolidated net revenue: No data was available for this market. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. a key factor contributing to its 14.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. Although operating costs are likely to be low in a small market like Gaspé.000 16. Influence of other markets: This is clearly an isolated market. with little or no influence from other retail gasoline markets.75 cents per litre.50 ¢ 3. Nevertheless.400 6 13 4. Gaspé is well-removed from any major highway. ancillary revenues would likely be modest. Nevertheless. This is a major factor in the high cost of gasoline in this market. amounting to a reduction of 5. located at a considerable distance from its rack source of supply.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market.33 ¢ 14. this margin was only slightly higher than expected for a market with these throughput attributes.Gaspé population # of brands # of outlets outlets per 10. in fact the highest in the study group. a product of high freight costs and gross product margins. Freight costs are therefore high.17 gross product margin the highest of the study group. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. both pump and extax prices in this market were higher than average. in the case.900 litres 17. by tank truck.

Saint John NB population # of brands # of outlets outlets per 10. retail pump prices are ultimately a reflection of rack prices. That a major refinery resides in this market might suggest that these prices should be among the least in the country. In fact. ex-tax prices were relatively high. Accordingly. do not differ markedly from any other rack point in the study group.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada.694 litres 9. Nevertheless. this market fell within the expected range of gross product margins as a function of outlet throughput. which for Saint John. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. reflected in the high ex-tax pump price. Figure 35: Saint John NB . and therefore. with or without a local refinery.ex tax Canada Average . Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets. posted pump prices in the Saint John market have closely followed the 10-city average.27 ¢ 9.000 74. Saint John presents some unique characteristics for the market study. and is capable of shipping and receiving wholesale product through marine facilities. Price history / Taxation: Historically. resulting in lower than expected average outlet throughputs.79 ¢ 0.095.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Consolidated net revenue: was average for the study group. the Saint John retail market is relatively isolated from other retail markets of any significance.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . Average gross product margin was consequently high. Since provincial taxes are among the lowest in the country.extax MJ ERVIN & ASSOCIATES 69 . freight costs in this market are low. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner. it is an established rack point. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor.970 9 56 7.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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..... the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads..... a feature of most market-regulated commerce......51 Finding 21: Based on published rack prices and the individual outlet data............................................... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences.... In effect......... .................................... 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.. after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements................................. these ancillary operations contributed to a lower product margin and consequently........................... .....Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products....................... 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness........................................... when compared on an ex-tax basis............ 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. 33 Finding 13: From 1991 to 1996.......... 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.. .... 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences............. The viability of the Canadian retail gasoline sector as a whole may be somewhat better........... and likely a negative impact on consumers.... particularly in comparisons of major urban markets to small. the profitability of the 481 outlets studied appears only marginal.......................................... 71 MJ ERVIN & ASSOCIATES 73 ....... reduced pump prices.................................... .. which ensures a competitive product price for buyer and seller alike...... given the possibility of discounts from posted rack prices and potentially lower overhead costs................ 50 Finding 20: For the 481 individual outlets studied.................. ........................ the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre................. while those with high Gross Product Margins tend to have low outlet throughputs... The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations........................... residuals for outlets not studied may be better............... which in turn.... remote population centres.......................................................... ............. petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied........ 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US.......... while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre.... are principally a reflection of changes in the underlying price of crude oil.............. 48 Finding 19: Based on published rack prices.....................................

Canadian prices have been at or below US prices in recent years. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Although an objective measure of competitiveness is elusive. in comparing Canada average (city) pump prices to those of the United States. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. was shown to be strongly competitive: • A long-term decline in pump prices. each with unique dynamics. when measured in constant and nominal dollars. is mistaken. As described in this study however. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). over the long term. The resultant margins. exhibited a diminishing trend (Finding 13). The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. 2. In comparing several diverse markets. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement.Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. The Canadian retail petroleum products industry. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . The study presents such a model. the very margins within which this industry operates has. This has not simply been a result of a decline in underlying raw materials costs. was observed (Finding 10). 1. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. place. Virtually all of the competitiveness indicators examined in this study relate to price. Rack and pump prices are determined in competitive marketplaces. when taxes were excluded (Finding 14). a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. by all objective measures available to this study. and promotions are the other three). price is but one of four competitiveness “tools” available to marketers (product. On a national level.

5 cents. This implies that the competitive dynamics pertaining to these retail markets can. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. these markets have managed to sustain a certain level of viability and competitiveness. but given its magnitude. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. This would entail the tracking of not only pump price. Petroleum product taxes are levied at the federal. and in some markets. While some markets. but even in such cases. or even between Canadian markets with differing tax structures. rack price and freight cost. for example) were rationalized. measured against the average outlet throughput for that market. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. but also rack prices and outlet performance. demand and other competitive factors existing at the time. and accordingly. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). when the “outside” factors (tax. an exercise that consumers are unlikely to engage in. presents a competitive disadvantage to Canadian marketers. provincial. taxation as an element of public policy is an area worthy of additional research. and product margins accounted for 3. vary considerably from one population centre to another. and in some markets. experienced higher than average pump prices. and do. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). Taxation is a significant factor in the price of retail gasoline. Due to the localized nature of competition in the retail gasoline marketing sector. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. it is important to understand that. Dealers were shown to have a variety of relationships with their supplier. By contrast. taxation differences between Canadian and US markets. retail petroleum markets are considered local (municipal) in scope. generally do not serve as competitiveness inhibitors. well over half of all outlets in Canada operate as lessees or independents. In applying such a model to the retail petroleum marketing industry. are thus a reflection of the state of product supply.even negative values.3 cents or 9 percent (Finding 5). 3. municipal levels of government. The demonstrated exception to this is in markets directly adjacent to nearby US markets. MJ ERVIN & ASSOCIATES 75 . since this is the effective range of consumer choice. refiner margins accounted for 5. or 6 percent (Finding 6) of the 1996 average regular pump price. crude costs accounted for roughly 34 percent (Finding 2). and are a predominant cause of inter-regional pump price differences (Finding 16). The latter two can vary considerably from one market to another. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. particularly smaller ones.

In fact. and more price-stable markets such as Sioux Lookout. supplier costs and profitability. Pump price fluctuations can be an indicator of competition in the marketplace. Sioux Lookout. exhibited competitive traits typical of any of the study markets. the absence of price war activity does not imply a lack of competitiveness. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). Retail pump prices showed a corresponding seasonal pattern. is available to provide for all retail marketing operations including outlet costs. constitute a small portion of the retail pump price. Viewed from this perspective. This margin represents gross revenue (after wholesale product and freight cost) which. in a highly distinct. on a per litre basis. the Canadian retail marketing sector realized an average gross margin of 3. which represent the majority of Canada’s population base. which in turn. incorporated with ancillary revenues and outlet costs. showed a close relationship to underlying crude prices (Finding 11). translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. Demand for gasoline was shown to vary significantly according to the time of year. This consolidated outlet revenue. 4. fluctuating prices are a strong competitiveness indicator (Finding 7). predictable seasonal pattern. dealer income. Retail gasoline marketing revenues. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. Retail pump price changes showed a close relationship to underlying rack prices.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). and a loss in the case of urban markets. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. While price wars are undoubtedly an indicator of competitiveness. Rack prices were shown to not significantly differ between major centres. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. when distributed these three ways (Finding 20). MJ ERVIN & ASSOCIATES 76 . which in turn is the principal driver of ex-tax pump prices. second only to the United States. a price-stable market. when examined on the margin-volume model. The pump price/margin model shows that in 1996. on the basis of price fluctuation alone. 5. reflecting consumer demand behavior (Finding 15).

Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. but to increases in underlying rack prices. not price. crude costs. Both the downward trend in margins. these findings clearly show that pump price increases are ultimately linked not to increased profits. and have resulted from. based upon an assumed posted rack price. assuming all other costs were unchanged. Declining refiner and marketing margins. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. several competitive strategies. Indeed. this industry sector would have realized profits of unprecedented proportions. This trend has both resulted in. most outlets used in the 19-market study represent major integrated oil companies. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. if Canadian average pump prices were only one cent higher than they were in 1995. Also. 7. and has been a result of. despite increases in tax content and crude costs (Finding 12). despite the predisposition of many observers to use them as such. including: • • • improving production efficiency through refinery plant rationalizations (closures). the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). have caused. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. Industry profitability is extremely sensitive to very small changes in pump price. intense competitive pressures in the downstream industry in general. Thus. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. in the long term these fluctuations are likely more reflective of market restorations. While these economics might appear to place this industry in a position of poor viability.6. Since 1991. Thus. and in turn. MJ ERVIN & ASSOCIATES 77 . profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. Nevertheless. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. not excessive profits. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). serve as perhaps the most significant indicators of competitiveness in the downstream industry. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. Also. both of which are beyond the direct influence of Canada’s oil companies. and the marketing sector in particular. and the associated industry initiatives which are ongoing in nature.

Outlet throughput is a key determinant of inter-market pump price differences. which should. MJ ERVIN & ASSOCIATES 78 . 9. This created some economic pressure to sell product at a higher pump price. reduce pump prices. Smaller. Although some smaller markets appeared to have higher gross product margins than larger markets. While competitiveness in most smaller markets was shown to be as active as in larger centres. A wide range of petroleum gross product margins were evident within the 19market study group. it would seem that if local government in smaller markets were interested in lowering pump prices. and this study showed that gasoline prices were no exception. regardless of size. most markets. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. although this study provides comprehensive evidence of this. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). more isolated markets are generally higher than in larger centres. When these margins were compared to their corresponding outlet throughputs. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. according to the margin-volume model.8.5 million fewer litres of gasoline than a group A (major centre) station. there are three points to consider: • In very small markets. reducing the number of outlets may also reduce the number of competitors. The costs of most consumer goods in smaller. virtually all of the 19 study markets exhibited similar levels of competition. When plotted against the margin-volume model. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. which could actually inhibit competition. average pump prices were relatively high. • • At first glance. That such a relationship should exist was not surprising. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). thereby improving petroleum volumes and ancillary revenues at the remaining sites. the solution would be to encourage some dealers to exit the market. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. other factors exist which contribute to relatively high margins and prices. had petroleum margins which were commensurate with average outlet throughput for that market. In suggesting this approach however. poor outlet throughputs were generally the predominant factor. isolated markets face particular challenges: although found to be highly competitive. Thus. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities.

is viewed as an agency which exists to the benefit of industry and consumer alike. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. and the perceived effect on their markets. 11. The historical record is clear however: since deregulating pump prices. car wash. and as such. the Halifax market. and the traditional automotive service bay. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation.• A full-serve retail gasoline outlet typically employs 3-5 staff. is well beyond the scope of this study. the degree of price competition in the retail petroleum has in effect. The loss of employment represented by a station closure may be of some concern to smaller communities. characterized by narrow product margins and relatively flat pump prices. under the current PEI regulatory structure. is both the cause and consequence of increased activity in ancillary operations. 10. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. depressed petroleum revenues below that of outlet operating costs. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. As these findings show. Convenience store. Charlottetown. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. MJ ERVIN & ASSOCIATES 79 . many national and local environmental regulations exist for good cause. are an acceptable limitation on pure competition (Finding 8). The federal Competition Bureau for example. Also. will likely preserve a highly competitive petroleum market. and in turn. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. does not appear to benefit in consumer terms. and likely others in Nova Scotia. in order to build upon the findings in this study towards a full understanding of the dynamics at work. This competition then. Retail ancillary operations are a critical element of petroleum price competition. as marketers find even more innovative ways to attract market share. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). has seen a decline in pump prices relative to other Canadian markets.

Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. as it does in the Canadian petroleum marketing sector. 2. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. Public perception measurement. margins and competitiveness factors. possibly to the detriment of the consumer. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . would ultimately be reflected in carefully-considered public policy which serves to truly enhance. petroleum marketing competitiveness. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. A regular comprehensive competitiveness evaluation. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. not inhibit. 1. Develop cooperative industry research into marketing sector competitiveness issues. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. direct regulatory interventions may have an adverse effect on competitiveness. in a simple format designed for consumers and legislators. and the nature of competitiveness influences. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. This should be in the form of a quarterly summary of price trends and related measurements. Improve public understanding and awareness of competition in the petroleum marketing sector. and the converse image held in much of the public domain. that where a healthy competitive climate exists. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices.This study proposes rather. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research.

along the lines of the model used in this study. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. and regulators alike. and issues/opportunities facing such markets. using Canadian and foreign selected markets. using Canadian and foreign selected markets. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. • • • • * * * Better understanding of this industry. using Canadian and foreign selected markets. MJ ERVIN & ASSOCIATES 81 . A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. and in particular. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. by industry. consumers.

Appendices MJ ERVIN & ASSOCIATES 82 .

There are several modes (see below) of dealer operation.the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. Margin . such as a major oil company or regional refiner/marketer. Downstream . Major Oil Company . provincial pump tax..a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. currently established at 10¢ per litre. and therefore purchases its supply of petroleum product from an outside source. an association of petroleum refiners and marketers. such as a retail gasoline outlet. etc. MJ ERVIN & ASSOCIATES 83 . Lessee . Dealer . such as convenience goods. independent dealers. and included in the retail pump price. of transporting petroleum product from the rack point to the final point of sale. diesel. and commission dealers. Ex-tax Pump Price . health. Integrated Oil Company . Independent Petroleum Marketer . Excise Tax . Grade Differential . safety and business issues. generally expressed in cents per litre. and in some regions. Marketer . but inclusive of any corporate taxes on earnings.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers.(for the purpose of this study) the cost. for example. the regular unleaded pump price. CPPI . GST.an organization who sells refined petroleum products to end-use consumers. which serves as the voice of the petroleum products industry in Canada on environment. in cents per litre. car wash.a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. lubricants. etc. Distribution Costs . municipal tax levees.the difference in pump price between a premium or mid-grade of gasoline vs. Usually expressed on a per-unit basis.the retail price of gasoline that would be displayed if all product taxes were removed.a generic term referring to a retail outlet operator.I Glossary of Terms Ancillary service .a service provided in addition to the basic retail petroleum sales operation.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces.Canadian Petroleum Products Institute. The ex-tax pump price is exclusive of these taxes. These product taxes include Excise tax. service bays.a petroleum marketer who is not involved in the refining of petroleum products. such as lessees.. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee.

Throughput . Supplier . PCF . and independent dealer. an association of upstream and downstream oil companies and related organizations.an organization who. Rack Point . the supplier has initial title to the petroleum product as it leaves the rack point.the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products.Petroleum Communication Foundation. Regional Refiner/Marketer . manufactures (from crude oil) a range of petroleum products suitable for consumer use. Rack Price . Transfer Price . it is usually based on the market-driven rack price. MJ ERVIN & ASSOCIATES 84 . Refiner . these can be broadly classified as company operated.the volume (ie: in litres) of petroleum sold at a retail outlet in a given period. This may be at a refinery loading terminal.Mode . In the retail gasoline sector.within the context of retail gasoline marketing.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces. commission dealer. with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. Although in theory the transfer price could be set at any arbitrary value. is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products.the point at which title to refined product is transferred from the refiner to the supplier.the wholesale price posted at the rack point. usually per month or per year.the segment of the oil industry involved in the exploration and/or production of crude oil. or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. Upstream .the type of contractual relationship between the supplier and the dealer (outlet operator). lessee. the raw material from which petroleum products are manufactured.

1 104.1 115.5 100.8 106.8 1987 104.5 120.3 151.3 19.9 97.6 51.3 122.1 120.1 87.7 123.9 115.5 115.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.3 1989 114.4 27.8 135. No.4 29.4 97.0 42.1 117.5 126.6 92.0 1988 108.1 167.8 93.0 1991 126.7 54.3 115. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.9 1994 130.2 49.9 155.5 30.4 122.3 55.5 25.4 45.4 34.1 120.0 102.2 45.2 127.3 125.0 30.8 108.7 124.8 95.1 117.2 31.4 57.2 45.3 1992 128.1 151.7 118.7 96.1 26.3 58.3 134.3 132.3 139.4 120. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.4 104.2 133.2 39. MJ ERVIN & ASSOCIATES 85 .1 105.9 122.4 124.0 93.0 93.8 130.2 99.4 136.4 110.7 30.4 104.2 112.3 119.7 132.2 30.1 144.0 19.3 40. using a weighted (by provincial gasoline demand) 10 city average.1 1990 119. Nominal (¢/litre) (2) RUL Ex-tax Price.3 96.2 121.2 92.8 28.1 104.0 115.7 95.2 109.1 48.9 26.5 94.0 32.3 141.2 50.5 112. 62-010: Consumer Prices and Price Indexes.7 22.1 40.3 160.4 53.0 135.6 91.9 1995 133.3 27.3 52.6 122.0 104.6 133.5 111.4 152.1 97.2 20.5 49.7 122.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.1 103.9 108. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.9 118. Nominal (¢/litre) (2) RUL Annual Price.0 111.8 104.5 124.0 97.8 94.2 142.8 132.7 29.4 134.6 107.1 146. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.9 1993 130.9 26.8 47.6 136.1 126.5 145.

1 25.9 30.4 55.1 5.6 6.9 56.4 14.7 4.0 8.1 22.9 25.2 16.3 56.3 13.8 26.9 53.4 26.8 23.9 15.7 23.3 13.8 11.0 24.1 23.9 25.6 24.7 4.0 7.9 17.0 5.7 24.8 21.8 25.2 6.2 24.5 32.7 7.3 54.5 25.9 4.9 22.4 22.4 21.6 23.4 33.7 7.4 15.9 26.7 8.6 52.3 56.9 53.9 26.4 31.8 53.0 26.0 28.5 26.0 16.4 9.7 58.5 7.7 39.5 23.7 19.8 53.0 15.0 7.5 5.8 14.5 22.9 58.0 25.6 28.0 10.9 56.2 7.6 8.5 35.3 15.8 24.0 24.0 33.0 24.5 54.4 53.4 34.0 16.9 14.7 28.4 14.4 56.3 24.6 7.3 58.3 57.7 6.3 15.1 16.2 15.7 14.6 25.6 4.2 13.1 13.0 13.4 8.9 6.5 27.1 52.6 26.8 21.7 15.1 19.9 21.6 13.2 56.5 19.2 23.6 54.7 14.3 22.7 33.5 23.1 23.1 29.9 13.1 17.5 30.0 24.0 24.3 42.0 52.8 57.8 26.6 54.3 25.9 14.4 14.9 55.1 13.6 23.2 22.0 14.4 26.0 20.8 29.4 7.3 54.1 18.6 5.8 14.5 7.3 13.5 6.9 25.2 7.0 12.2 7.7 14.7 19.2 26.2 13.4 32.8 14.3 Tax Content 23.5 33.6 54.4 MJ ERVIN & ASSOCIATES 86 .8 8.1 23.7 18.5 57.0 24.6 26.9 23.9 4.1 13.2 21.5 28.9 23.2 8.2 6.9 54.9 7.7 13.2 14.2 41.8 55.0 16.5 8.8 30.5 56.8 23.1 7.3 13.2 27.1 16.5 10.4 13.3 26.1 24.7 32.6 25.2 11.2 26.0 25.2 27.8 22.9 8.3 6.5 15.8 9.6 21.2 63.2 14.2 16.5 11.7 Downstream Margin 14.0 24.5 26.4 29.0 7.1 53.1 9.3 17.6 13.3 23.9 6.7 18.5 16.4 24.4 58.5 14.2 12.9 55.3 66.9 24.9 25.7 29.6 9.8 13.7 14.2 27.7 12.9 7.2 7.1 21.9 25.3 9.4 20.5 10.0 54.7 63.1 16.9 9.6 20.0 26.9 6.5 Gross Marketing Margin Gross Refiner Margin 53.9 23.1 16.7 31.8 16.0 22.9 11.1 22.2 29.7 29.8 8.0 9.3 54.4 12.3 26.8 55.7 4.1 53.4 24.7 29.2 5.4 14.8 14.4 26.3 12.3 22.4 31.3 13.2 13.8 33.8 15.7 34.3 6.Table B: Key Price / Margin History .1 39.6 26.8 28.9 31.6 18.9 12.4 30.3 4.2 25.4 13.5 27.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.7 14.7 25.9 7.0 26.5 31.2 65.1 18.3 5.5 14.0 4.0 16.5 23.1 7.2 4.2 13.3 14.7 7.2 23.0 55.2 25.4 57.

5 14.3 9.7 14.5 6.6 3.7 53.5 21.5 19.6 12.7 53.5 21.3 6.2 26.0 6.5 9.1 26.3 4.4 21.0 6.8 20.3 13.5 11.3 26.8 17.2 23.3 55.7 6.3 26.3 25.4 25.4 21.5 20.8 29.1 11.4 16.9 49.3 4.1 Tax Content 26.5 7.5 13.7 3.6 20.9 12.0 12.3 21.2 27.9 6.3 9.0 9.5 21.7 51.0 28.9 4.7 52.7 25.7 5.2 15.5 15.1 3.8 23.1 51.0 26.7 26.0 24.6 20.5 19.0 52.2 26.0 28.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.7 6.4 13.9 19.0 28.6 11.6 10.6 16.5 5.9 27.1 57.8 52.7 53.6 53.4 51.1 54.8 28.1 24.6 19.9 14.9 17.9 3.7 23.3 53.0 25.7 13.3 26.3 26.2 Gross Marketing Margin 4.8 28.5 17.7 18.0 29.0 25.2 25.2 20.0 26.9 23.8 50.4 26.7 25.9 27.2 4.0 14.5 54.1 21.2 11.3 27.9 29.9 5.6 15.5 55.8 6.1 15.5 53.5 7.1 11.2 14.2 25.6 53.1 11.5 28.6 4.6 4.5 13.8 22.6 27.9 49.3 21.7 29.6 15.3 4.5 6.3 26.5 5.4 6.1 6.1 6.1 15.1 51.9 29.9 58.1 14.0 54.4 26.4 7.5 23.1 26.6 23.9 Downstream Margin 12.3 28.2 49.3 7.5 3.1 15.9 11.7 16.3 12.1 55.7 15.2 9.1 16.8 4.2 14.7 24.1 6.9 12.7 14.8 10.6 5.1 10.3 8.1 6.3 26.9 14.4 4.5 2.5 6.4 6.5 11.8 23.2 4.4 5.4 25.8 27.0 11.4 28.2 54.0 5.3 26.4 11.4 24.3 23.3 7.9 4.1 26.6 21.7 3.3 9.4 26.2 12.9 9.3 26.0 28.4 6.1 14.0 5.0 6.9 26.0 14.3 26.7 7.0 9.1 14.2 7.3 54.7 12.7 8.0 12.1 61.5 4.2 7.7 26.4 32.8 49.8 25.7 5.5 25.5 3.6 9.1 11.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .2 7.4 6.0 27.6 10.0 28.0 57.1 Gross Refiner Margin 7.2 20.2 28.2 26.3 28.2 5.1 20.4 15.3 58.0 53.4 26.7 13.2 7.9 28.7 7.7 24.2 14.6 17.

9 29.976.8 21.864 2.412 2.5 28.893.297 2.7 29.102.4 21.869 2.456 2.322 2.968 3.324 2.9 17.952.361.558.113.255 3.887.958.019.966.209.439.804 3.429 2.073 2.2 20.521 2.502 2.767.621.457 2.880 Canadian Retail Gasoline Sales (M3) 2.967 2.9 26.612 3.250.641.112 2.254.095.633 2.287 2.095 2.651 2.725.269 2.477.716.4 21.268 2.338 3.884 2.164.2 26.9 23.752 2.056 3.587.7 21.781.637 3.045.9 21.039.798.2 26.8 23.735.475 2.346.970 3.029 2.7 28.544 3.1 21.5 30.1 16.242 2.933 3.192.8 27.366 2.002.878 2.748 2.3 22.796.6 24.720 3.904.469 4.281.7 24.322 2.142.301.628 3.151.202 3.897 3.599 2.323 3.455.7 26.141.894.1 29.510 3.636.1 23.8 30.801.843.206.381 2.661 Canada Avg ex tax RUL pump price (¢/l) 39.4 32.027 2.609.822.9 23.321.133 3.620 3.316.7 29.4 29.646 2.246 2.6 21.3 22.081.5 32.168 2.889 3.739.101.671.422.804 2.373.3 Canada Avg RUL Rack Price (¢/l) 35.960.301 2.2 27.897.661 Canadian Domestic Gasoline Sales (M3) 2.015 3.131.732.311 3.709 2.625 2.141 3.6 23.979 3.6 28.122.283.7 34.108.461 3.874 3.1 23.501.733 2.619 2.883.8 29.130 3.873. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.114 3.827 3.839 2.9 19.775.462.5 19.693 3.508.035 2.2 21.654.8 MJ ERVIN & ASSOCIATES 88 .709 2.430.300.667 2.7 24.322 3.479 2.132.673 2.886 3.020 2.281 2.037 2.853.714.2 23.286.011 2.182 3.9 26.251.580 3.429 2.9 30.565.4 25.152 2.045 2.295.025.097 2.8 26.256 2.785.176 2.313 2.333.626.4 24.354.743 2.970.298 2.326.677 3.089.378.199 2.1 22.973.070 3.389.748.897 2.030.2 27.000 3.301.615 2.140.932 2.765 3.669.409.4 24.636.498.630.853 3.970.218 3.744.0 28.045 2.1 23.0 24.9 31.188 3.564 2.684 2.871 2.254.120.345.480.509 3.2 29.161.2 27.415 2.085.810.416 2.122 2.287.176 3.220.441.287 2.2 27.5 22.0 20.141.682 3.672.900.613 3.490 3.270 3.130 3.379.8 33.572 2.813 2.890.703 2.941 2.4 31.450 2.622.2 24.180 2.437.044 2.627 2.7 18.532.644 3.299.299 2.3 23.934.Table C: Canadian Supply.331 2.101 2.773.067.801.160 3.688.930.592 2.633.818.485 2.070.499 2.666.935 3.026 2.291.2 22.335 2.808.9 23.201.767.083.7 29.865.831.840.232 3.841 2.279 2.181.600.047 3.8 28.779 2.437.180 3.245.995.604 2.844.710.047 2.218.687.051 3.823.5 27.518.294.3 26.370 2.642.4 22.329 3.235 3.837.782 3.075.369 2.377.403 2.979 2.647.5 27.022.202.9 22.191 2.682.969 2.8 23.427.3 23.179 3.003.193 3.771 3.325 2.263.315 2.938.931 3.473.254 2.285 2.876.2 23.180.516.411.5 23.476.443 2.998.799. Inventory.6 26.830.458.193 3.369.3 24.558.566.930 3.729.802 2.8 22.5 31. Demand.859 2.833 2.589 3.262.853 2.7 31.5 25.

614.785.346 2.469.9 22.170 3.999 3.667 Canadian Domestic Gasoline Sales (M3) 3.344 3.5 source: Statistics Canada (production.648 3.2 25.717.195.4 26.649.965.4 26.130 3.324.155 2.382.198 2. demand.006 3.8 24.198.930.6 20.068.0 24.467 2.649.864 2.857.936 3.170 Canadian Retail Gasoline Sales (M3) 2.315.940 2.480 2.148.675 2.483.871 3.264 2.386 3.005 2.149.165.658.919 2.426.597 2.555.204.961.074.617 2.669 2.390.904.4 20.881.928 3.977.644 3.214 2.986.141 2.863.997 2.4 25. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .048.566 3.994 3.415 2.0 25.714 2.244 3.219 Canada Avg ex tax RUL pump price (¢/l) 27.261.601 3.8 21.182.537.082.198.1 24.6 20.505 2.077.9 27.250.0 26.9 29.097.799 2.8 25.984 3.796.2 25.7 21.539.5 21.123.679.797.179.7 Canada Avg RUL Rack Price (¢/l) 20.791 3.671.906.889.0 25.656 3.037 3.264 2.363.376.370.7 19.442 2.620.607.840 2.593.294 3.1 21.386 3.638 2.5 25.521 2.414 3.806.7 22.055 2.970.8 28.8 20.338 2.660 3.2 26.703 3.5 21.205 2.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.324 2.773.336.184.606.516 3.825.0 26.317 2.222 2.112 3.830 3.753 3.692.320 3.519.

5 58.1 50.5 60.7 65.9 54.7 65.8 56.4 47.5 58.9 52.2 61.8 48.9 64.2 54.4 52.6 50.2 Nanton Peace River Regina 49.2 55.2 65.0 61.6 47.1 55.5 56.9 49.3 50.9 61.9 55.5 56.9 51.7 54.2 46.3 56.5 57.4 56.9 54.5 45.9 54.9 50.9 54.4 61.2 57.8 47.0 62.0 61.4 63.0 39.4 55.6 55.5 47.9 51.5 59.5 59.2 51.2 62.5 60.8 52.9 56.9 53.0 61.2 46.0 46.0 61.3 52.1 41.9 57.0 59.5 57.9 53.0 61.8 53.8 56.2 62.6 47.5 54.5 59.2 54.9 59.1 55.8 56.5 53.8 Thompson 59.9 54.1 55.9 58.8 53.3 59.6 58.9 45.3 62.8 50.5 60.6 62.5 57.4 56.5 59.8 45.4 52.3 50.9 64.7 49.6 46.5 59.9 46.9 55.9 48.9 51.2 50.1 49.5 57.9 58.4 58.5 58.2 43.7 50.7 50.3 48.5 53.5 52.7 51.1 43.4 50.8 49.3 54.3 52.1 56.1 52.5 58.1 44.5 51.7 45.3 48.9 53.0 50.4 52.9 56.5 57.9 58.8 51.2 63.8 48.0 Sioux Lookout 62.4 61.9 64.4 52.6 46.4 48.9 62.4 54.9 64.8 41.8 52.5 51.9 55.9 56.9 53.6 48.8 64.2 48.3 55.9 53.8 53.5 50.3 61.7 52.9 64.9 59.6 55.5 57.4 61.7 62.2 62.0 62.4 57.3 52.5 45.1 44.8 56.2 62.8 50.6 51.9 62.9 54.4 46.5 58.5 47.5 57.4 53.9 52.8 52.9 52.0 48.6 50.5 57.5 58.5 57.9 53.2 62.5 62.5 61.4 54.6 52.4 56.7 48.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.8 56.5 46.5 47.9 53.4 65.5 57.7 53.8 47.8 59.6 44.3 52.2 47.4 49.9 56.9 55.9 52.2 56.1 53.9 61.7 44.9 53.5 58.6 58.7 51.6 48.4 55.0 58.5 61.5 56.4 59.8 57.4 57.5 59.2 54.4 55.0 61.1 60.8 54.4 55.4 54.7 46.1 49.8 59.5 56.4 Winnipeg 49.2 58.5 51.5 58.5 54.6 53.4 58.9 63.2 62.4 53.7 48.5 60.0 61.4 55.7 62.9 61.9 56.3 55.5 57.9 61.9 47.4 53.5 59.8 56.7 45.5 51.7 57.6 54.7 54.7 65.5 55.9 56.5 51.5 59.9 44.5 60.2 65.6 54.3 54.3 42.9 51.8 48.5 59.1 49.9 58.7 53.9 52.3 49.3 52.9 47.2 51.6 49.5 Vancouver 53.0 62.9 57.9 49.0 57.8 57.2 50.5 60.7 52.0 59.9 53.4 55.5 52.0 52.5 57.5 53.5 58.6 47.9 61.2 62.6 53.2 59.5 58.9 56.3 49.9 56.7 51.7 53.4 56.6 56.9 56.7 White Rock Calgary 45.8 52.9 53.9 58.Table D: Pump Price History .9 52.9 49.9 53.5 49.8 48.5 58.5 56.5 58.4 46.8 53.4 56.2 50.4 46.6 48.9 52.9 44.7 54.0 44.9 56.1 50.2 46.2 51.5 57.9 MJ ERVIN & ASSOCIATES 90 .7 65.0 54.6 59.9 47.4 52.7 65.3 51.9 61.7 57.8 55.2 62.1 52.2 62.8 44.9 54.9 56.4 56.0 55.8 52.1 53.7 63.5 55.0 52.1 59.9 47.9 54.

7 51.6 55.3 55.5 60.4 57.9 64.3 55.8 54.1 58.1 48.5 57.5 51.8 54.7 46.9 54.8 55.7 57.3 54.6 55.4 54.8 61.6 50.3 52.7 50.1 55.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.3 59.7 56.3 56.6 54.7 51.5 56.2 53.6 56.7 58.0 51.9 55.0 60.6 59.2 57.1 53.0 60.7 52.3 53.3 56.3 55.2 51.9 52.3 49.5 52.5 56.4 57.7 60.2 61.7 56.9 56.9 55.4 51.6 56.8 50.2 60.6 58.4 54.1 55.6 50.1 54.5 59.7 56.0 52.5 55.5 57.3 55.3 59.7 51.4 53.6 59.9 53.8 54.9 51.6 57.4 49.8 56.1 61.3 54.7 56.3 52.3 61.1 57.9 61.4 53.4 57.5 56.2 57.0 53.8 Halifax Charlottetown 60.7 59.0 49.5 56.4 58.4 58.1 60.7 53.9 49.8 61.9 61.6 50.9 55.4 54.4 58.6 52.8 63.6 56.6 52.5 64.9 57.6 61.3 55.2 57.8 53.2 58.6 56.8 49.8 57.0 52.2 54.6 58.1 51.2 56.2 58.9 53.9 55.3 49.9 55.1 61.2 Chicoutimi Gaspé Saint John 60.4 54.3 53.9 61.0 55.6 55.3 53.8 55.5 63.0 56.4 54.5 67.1 Toronto 52.5 Ottawa 58.8 49.5 57.4 51.0 55.3 59.2 61.3 54.7 54.0 53.2 57.3 54.6 53.4 53.1 53.6 55.0 60.8 55.9 64.4 54.9 63.7 52.5 57.2 56.6 49.7 48.3 54.0 55.Table D: Pump Price History .5 53.9 53.9 61.1 55.7 56.6 54.4 58.9 64.8 55.4 57.0 59.2 54.5 52.2 57.9 55.9 54.1 54.2 52.5 53.1 60.7 55.8 57.2 60.0 55.4 54.8 55.7 57.8 55.3 58.7 51.0 55.0 50.2 50.4 50.7 54.5 64.6 59.0 54.6 49.9 55.1 53.8 56.5 57.1 57.3 54.3 54.8 59.4 55.1 52.7 47.5 59.5 54.4 54.5 MJ ERVIN & ASSOCIATES 91 .4 60.2 59.8 50.7 44.1 54.6 51.1 53.6 51.6 52.2 58.5 58.5 63.5 55.6 52.0 54.6 54.3 53.1 56.9 57.6 55.5 54.8 57.3 54.0 52.0 50.9 56.0 52.9 55.0 50.1 54.1 55.3 54.7 54.5 52.7 53.3 56.1 59.6 55.2 53.8 54.8 60.2 49.9 49.1 52.4 57.6 53.3 55.2 55.0 60.0 58.0 47.6 60.1 53.6 51.7 57.5 51.2 61.0 47.3 51.4 52.1 55.6 58.2 56.0 56.9 53.6 55.8 52.5 54.5 53.8 60.5 54.7 59.7 54.0 61.6 54.7 48.1 49.9 58.2 56.9 58.9 57.5 55.0 52.5 61.3 56.9 49.6 52.5 54.4 55.7 54.4 58.0 48.5 54.8 51.1 56.0 57.9 56.2 55.9 50.1 58.9 60.7 49.5 54.9 62.6 54.7 64.9 49.2 49.2 56.5 59.6 52.8 50.2 52.6 54.6 63.2 54.2 57.3 60.2 54.4 52.0 61.2 57.2 55.5 61.2 55.0 52.8 52.3 52.0 57.6 54.1 58.1 57.0 55.3 57.5 63.2 49.8 55.0 57.6 52.2 Montreal 63.6 53.5 60.2 53.2 57.2 59.6 63.1 52.7 58.0 57.5 53.1 58.0 54.0 51.2 56.7 54.3 52.7 57.6 58.9 56.2 52.2 51.9 57.6 53.4 45.3 62.1 51.8 53.8 47.8 55.9 60.1 54.9 55.4 57.2 56.7 56.9 61.1 61.1 54.4 51.6 Canada Avg 55.4 53.5 51.2 54.1 59.6 63.3 53.3 56.2 51.5 56.1 51.2 57.7 52.9 54.0 59.2 55.0 59.4 58.5 51.2 55.0 53.7 57.1 56.9 53.2 49.1 55.6 58.5 61.9 55.6 61.2 57.0 48.5 52.2 56.0 54.5 48.9 60.3 59.8 53.0 56.

1 Apr-95 30.4 27.4 22.4 MJ ERVIN & ASSOCIATES 92 .2 Dec-94 26.4 20.6 23.6 23.0 31.3 24.3 30.7 29.1 26.0 24.0 31.1 Mar-95 29.4 31.4 25.6 25.6 25.9 25.3 23.8 29.9 30.9 23.5 24.6 23.0 25.4 Dec-92 31.3 29.8 22.8 29.4 31.4 30.5 26.8 24.1 Feb-93 29.0 22.8 26.1 24.5 24.9 25.3 26.7 Sep-94 32.9 28.6 27.9 24.5 24.8 28.2 Apr-93 28.2 27.8 24.7 30.9 27.1 31.3 29.4 20.9 29.1 24.8 27.3 24.8 Dec-93 26.5 23.5 27.6 24.9 28.4 23.1 25.2 Nov-94 29.5 Oct-92 30.3 23.3 Jul-92 31.4 25.4 28.9 20.6 30.5 28.2 Jun-94 31.6 29.9 25.6 29.4 28.6 29.7 28.4 Mar-92 28.9 28.3 Jan-93 30.0 29.9 26.0 21.9 Aug-93 30.2 25.6 28.3 28.7 Jan-95 27.2 26.1 20.4 31.4 28.3 26.3 28.6 27.4 24.5 Nov-95 30.0 Oct-93 28.6 24.1 25.6 26.3 29.9 Oct-94 32.2 24.3 26.9 24.9 Jul-93 28.7 26.4 25.7 24.2 28.6 28.8 31.1 27.1 24.9 25.3 30.7 31.7 28.4 25.8 27.8 29.1 25.3 29.1 19.9 27.6 Aug-95 30.5 Jul-95 30.Table E: Ex-tax Pump Price History .2 25.7 29.9 24.7 27.7 29.7 24.3 28.2 32.4 29.3 30.9 30.6 26.5 25.4 30.0 27.4 29.8 25.6 29.6 26.8 28.4 30.4 27.0 32.4 26.2 26.5 27.8 26.6 30.4 31.2 29.4 29.2 28.4 21.5 27.3 30.9 25.5 Aug-94 28.7 27.8 25.5 Oct-95 30.2 Nov-92 31.6 26.9 24.1 25.4 27.4 20.5 Jul-94 29.3 29.9 24.7 30.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.8 27.0 23.5 27.1 23.2 26.0 28.8 24.3 27.9 28.5 Feb-92 28.6 30.0 26.4 31.7 28.3 29.1 26.1 27.6 Sep-93 28.8 Jan-94 25.2 Nov-93 27.3 32.7 Aug-92 24.2 28.7 Winnipeg extax 27.6 22.7 26.1 31.8 27.3 33.0 27.5 27.3 27.5 26.9 23.9 29.1 Apr-94 29.4 23.9 30.6 26.9 29.7 30.0 23.8 24.2 22.5 29.9 27.0 Jun-93 26.6 May-95 29.5 21.7 Jan-92 31.8 29.3 29.4 31.0 Apr-92 30.3 26.1 22.3 Dec-95 Edmonton Regina extax extax 27.3 28.3 May-94 28.3 Feb-95 26.0 26.3 21.7 30.9 31.3 24.4 30.3 29.8 28.5 23.3 28.5 21.7 28.1 28.7 Sep-95 30.5 29.2 24.7 26.2 28.0 25.5 Sep-92 29.4 22.9 21.6 26.4 24.8 26.7 28.0 23.0 24.8 21.6 26.4 25.9 26.0 23.0 26.6 Jun-92 32.2 29.6 26.9 27.6 23.8 27.5 29.3 26.5 29.4 29.0 23.8 26.6 21.4 23.4 22.7 28.4 29.6 22.8 25.1 30.7 29.4 27.0 25.3 31.7 25.7 30.9 26.6 27.3 29.0 May-92 28.8 27.4 Jun-95 30.9 21.3 29.7 Mar-94 28.4 27.4 29.2 26.8 Toronto extax 26.8 23.2 27.6 Mar-93 28.5 29.7 26.2 24.1 30.4 29.8 Feb-94 24.0 May-93 29.6 27.4 31.1 22.2 24.0 24.9 26.1 28.2 23.

7 24.1 22.3 28.3 33.2 28.2 26.7 24.6 32.3 24.1 29.7 27.5 25.8 28.2 32.2 36.9 30.0 33.7 22.0 34.9 27.7 32.8 29.4 33.9 35.7 27.3 31.9 31.5 30.4 25.9 29.5 36.3 34.2 27.3 25.2 27.8 27.8 26.8 25.3 23.5 33.4 21.8 36.7 24.6 29.3 25.4 28.6 26.1 34.6 28.2 21.3 27.7 26.2 30.6 28.8 29.7 26.9 29.9 26.0 29.5 30.7 34.8 27.5 31.6 27.3 29.0 33.0 36.6 28.8 23.5 28.3 28.7 26.5 25.2 28.6 26.9 27.0 33.5 32.0 31.2 34.0 32.8 28.9 29.5 25.3 34.0 28.6 26.Table E: Ex-tax Pump Price History .4 31.8 26.5 29.1 Montreal extax 31.2 27.0 26.4 36.0 25.2 27.2 29.7 29.3 28.4 24.2 30.2 24.6 34.4 22.7 28.5 27.0 28.2 25.3 31.3 29.4 33.6 27.7 30.1 30.9 24.9 32.9 33.3 29.8 23.0 25.1 29.4 26.8 32.8 24.2 25.7 28.4 25.8 28.1 25.5 25.5 24.9 30.2 24.3 29.6 23.6 32.0 34.1 32.6 36.8 23.8 27.6 28.9 31.3 31.0 32.3 34.6 32.6 Charlottetown extax 36.8 30.2 33.6 26.7 26.5 28.8 28.0 25.2 22.0 27.2 32.8 26.5 28.6 33.3 30.3 26.5 27.7 MJ ERVIN & ASSOCIATES 93 .6 32.4 25.8 32.9 29.2 25.2 22.3 28.6 36.6 25.2 22.5 25.9 37.1 26.5 33.6 32.9 32.2 28.8 28.7 29.7 23.4 24.6 33.8 29.3 25.4 36.6 28.0 33.8 29.3 28.6 23.3 31.0 28.8 33.5 31.7 27.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.6 27.2 26.7 28.2 26.9 27.2 27.5 25.1 28.2 32.8 32.8 25.8 Canada Avg extax 29.2 27.3 29.0 33.9 32.6 22.7 32.4 31.7 32.0 34.1 26.2 22.3 26.4 33.6 31.1 29.9 28.5 33.9 26.1 28.1 24.5 27.0 29.7 26.9 26.4 34.0 28.7 27.3 27.4 32.7 25.3 26.8 30.8 30.3 35.4 33.9 27.4 27.5 24.9 32.0 36.7 24.6 25.7 26.0 26.2 27.1 30.9 30.7 30.5 26.2 26.0 23.4 31.3 31.6 31.2 27.4 28.8 29.4 33.2 25.5 26.9 27.2 36.4 26.4 32.7 34.9 30.9 28.0 26.7 33.5 34.1 24.7 23.0 30.8 32.2 Saint John Halifax extax extax 34.2 26.7 28.3 25.1 23.7 Quebec extax 32.4 25.8 26.8 25.1 31.7 23.4 32.5 30.2 23.1 24.7 28.8 28.7 24.0 30.0 28.1 24.5 28.5 27.1 32.0 23.1 32.8 26.2 30.8 33.3 22.1 34.1 30.9 23.6 34.9 29.6 29.6 24.9 33.8 23.1 32.0 29.9 30.1 34.9 29.8 25.2 27.8 27.9 29.4 26.2 33.

7 19.4 22.0 21.2 19.7 20.4 21.8 21.1 21.4 23.3 17.3 21.1 Halifax rack 20.7 23.8 23.9 21.6 21.7 21.8 18.3 21.6 25.1 21.1 15.4 20.9 18.3 20.6 20.6 23.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.2 20.6 19.8 19.1 22.2 22.3 21.7 17.1 20.4 22.5 20.1 22.3 18.4 21.8 22.7 MJ ERVIN & ASSOCIATES 94 .5 22.1 20.3 23.3 20.2 23.0 19.5 23.8 19.5 17.0 22.2 21.5 22.7 20.5 24.5 17.3 23.2 21.9 22.0 19.2 Quebec city Montreal rack Toronto rack rack 19.7 16.2 20.7 22.1 21.1 21.7 22.3 20.4 23.4 22.5 21.1 23.1 23.1 22.4 21.7 22.5 21.8 23.8 27.9 17.4 21.2 29.0 23.8 21.7 20.9 22.2 21.8 21.6 23.9 21.8 23.6 23.5 17.3 17.6 19.2 18.9 23.0 24.2 21.5 20.9 23.6 25.3 18.9 22.8 18.2 20.5 27.8 25.6 20.9 22.4 21.Table F: Rack Prices .8 23.2 16.0 23.9 21.4 21.3 23.1 22.1 21.5 23.4 22.2 18.2 16.7 21.5 22.1 20.3 19.8 21.2 16.4 23.3 23.6 20.9 20.1 20.8 19.4 21.7 22.8 22.3 20.9 21.7 17.5 21.5 21.4 21.5 22.7 18.9 19.5 20.2 20.6 20.8 23.6 25.3 22.8 18.5 18.1 21.4 18.4 22.1 23.9 18.7 21.4 19.2 18.7 21.8 20.4 17.0 21.2 21.1 22.8 23.0 23.3 23.8 22.4 22.8 20.9 22.1 19.1 20.4 24.7 22.2 21.8 20.7 22.1 19.6 19.3 26.4 22.6 23.8 20.7 21.9 22.9 21.5 21.2 23.2 20.4 21.2 20.5 20.8 20.7 17.3 19.6 22.0 22.8 21.3 22.3 22.5 24.3 23.6 20.9 20.2 22.6 18.2 21.4 20.7 22.9 18.8 21.0 23.3 17.8 22.9 22.4 22.5 23.6 23.4 21.4 15.3 21.0 21.5 22.5 22.1 21.1 18.4 22.0 19.3 19.2 19.3 22.8 18.2 18.2 18.2 21.9 25.0 23.4 21.2 23.5 26.3 18.1 20.7 22.6 19.8 23.5 19.3 21.4 20.6 23.1 19.8 24.0 22.9 21.4 23.1 15.6 20.0 21.5 19.1 22.0 23.3 24.7 23.8 20.8 Ottawa rack Thunder Bay rack 20.0 22.7 19.4 20.2 23.0 22.5 24.0 21.1 16.2 17.0 23.0 21.0 22.1 20.2 19.0 21.4 21.6 21.7 21.8 19.3 24.8 22.6 19.4 22.4 22.9 18.6 19.4 21.0 20.7 21.0 23.4 20.5 21.5 21.1 24.0 20.5 21.9 24.2 22.1 22.6 20.9 20.7 22.3 23.5 18.1 20.1 21.3 19.7 18.

6 21.3 21.3 24.0 21.1 23.3 23.3 19.9 22.9 23.1 22.4 21.0 23.1 20.7 22.2 23.5 21.9 24.9 18.7 22.9 21.4 24.5 22.8 Vancouver Victoria rack rack 24.7 23.8 23.2 24.8 22.6 20.2 23.5 24.7 17.0 23.4 21.0 23.4 20.2 22.3 17.1 21.3 17.1 23.5 21.0 17.9 21.8 23.9 23.1 16.9 22.9 19.8 22.0 24.3 20.7 22.0 24.0 22.0 22.5 Canada avg rack 22.1 22.0 24.6 20.4 24.7 19.3 23.6 22.8 24.8 21.2 24.7 23.6 23.1 23.4 21.9 24.3 22.3 23.4 22.9 17.7 25.9 21.7 21.1 21.0 18.1 22.5 21.2 23.5 22.7 21.7 21.7 21.2 22.5 23.5 19.7 21.5 21.2 20.0 21.9 18.5 23.0 21.3 22.1 21.0 24.1 23.6 17.8 23.2 21.4 18.3 23.5 19.4 24.3 23.8 24.1 25.5 22.7 21.6 21.2 23.7 21.8 25.0 17.9 23.9 23.5 23.4 21.0 23.4 22.2 23.6 21.8 20.6 22.4 22.7 21.8 19.6 19.0 21.3 20.5 22.3 21.5 24.6 21.1 21.7 22.8 24.4 21.7 24.0 23.6 23.5 21.5 19.1 22.8 22.7 23.7 24.4 19.5 23.6 22.3 21.1 22.2 22.9 19.2 19.4 19.5 21.0 18.0 22.7 23.7 24.6 21.7 21.6 23.4 22.3 24.9 19.2 21.3 20.5 24.4 23.6 20.9 22.1 21.0 20.9 19.7 23.9 20.9 22.6 24.9 21.7 22.6 21.2 20.0 20.9 22.8 21.3 20.2 22.1 18.9 19.6 25.4 20.7 21.4 22.0 21.6 22.1 23.7 20.0 20.9 22.0 22.6 25.1 23.2 22.5 20.2 23.8 22.4 21.9 21.1 16.5 23.5 18.4 21.1 17.2 24.5 22.3 19.1 21.5 22.4 23.2 Edmonton Rack 23.0 22.8 20.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.1 18.7 22.9 21.9 22.2 21.8 18.2 19.3 22.1 21.3 23.6 21.6 23.5 23.8 20.8 23.1 20.1 23.6 23.9 21.1 22.7 21.1 21.1 23.7 22.5 18.7 17.3 21.3 23.4 23.8 21.8 22.7 21.5 21.6 21.5 20.6 24.5 20.0 20.5 17.9 19.0 22.1 19.2 22.6 20.5 21.9 20.2 22.5 20.7 22.5 19.1 25.0 22.1 23.3 17.1 25.9 22.7 22.9 21.8 21.6 25.6 19.6 21.4 25.9 21.2 21.9 24.5 21.4 24.3 24.1 19.1 24.8 20.9 20.2 22.7 25.0 22.9 22.5 21.3 22.2 21.2 20.2 18.2 20.4 23.3 24.9 23.7 18.6 23.9 23.Table F: Rack Prices .8 22.1 20.6 23.6 23.5 23.6 21.7 22.1 23.5 MJ ERVIN & ASSOCIATES 95 .3 18.2 20.8 20.6 17.9 19.2 24.2 24.0 25.5 24.4 21.

245 351.94 55.60 60.412 722.78 67.72 63.00 67.20 58.448.23 63.42 53.890 2.983 1.97 63.643 184.009 54.597 2.40 58.298 576.72 58.34 63.905 183.687 1.102 98.97 51.296 179.000 1.86 56.22 59.40 59.438 591.70 55.20 61.698 Note: Regional.000 217.89 65.10 52.400 142.712 1.80 64.17 Diesel 64.40 61.971 473.894 1.30 54.93 63.55 58.26 63.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.922 103.89 61.60 50.483 2.72 74.20 54.796 529.030.83 68.26 44.89 60.810.770 2.16 59.557.13 58.621 102.056.19 52.119 632.101 256.949 1.23 53.543 2.249.513 19. MJ ERVIN & ASSOCIATES 96 .194.192 2.30 54.90 67.28 65.38 56.50 55.749 91.334.220 389.48 56. and All Study Markets are weighted (by market population) averages.414 450.74 57.483 63.058 2.85 48.45 53.20 59.141.745.32 51.35 73.935 758.850 126.985 636.858.07 61.420.636.11 58.85 54.625 64.529 123.702 333.903 33.060.093.980 120.014 3.70 49.246 2.895 600.000 1.052 84.702.40 63.66 50.790 185.00 48.00 66.204.153 316.554 2.211 15.238 2.241 451.73 65.174.018.166 102.00 62.88 54.997 397.50 56.508 2.704.300 578.972 429.87 61.897 350.30 66.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.834 71.475 1.Table G: Study Market Data .00 57.268 478.98 59.018 2.10 63.30 68.03 58.92 51.516.837 329.24 61.45 63.30 63.90 62.250 748.10 53.150 48.60 70.196 669.460 833.678.113 2.101 447.19 49.10 59.00 57.25 57.234 799.18 51.30 52.945.620.933 25.60 49.65 54.20 60.120 570.90 63.628 702.671 399.214 248.811 120.332 101.88 64.796 2.26 49. Urban.36 54.377 30.686 273.830 2.000 63.669 203.53 61.614 3.749 243.832 91.370 41.859 240.53 48.50 56.02 51.30 57.40 54.549 111.145.173 568.500 378.

33 21.41 27.28 22.34 25.69 27.23 26.89 28.33 27.33 22.63 28.55 28.99 26.65 26.09 27.16 29.04 24.31 22.95 22.36 24.59 22.15 24.23 24.03 20.45 20.13 23.25 24.27 29.68 Diesel 36.65 21.30 29.59 24.93 27.92 22.53 23.96 24.23 23.84 28.69 23.90 26.07 26.32 21.83 24.97 22. MJ ERVIN & ASSOCIATES 97 .83 22.07 24.23 25.92 21.42 25.73 32.45 22.47 20.93 23.51 20.85 28.39 21.59 28.40 27.65 27.93 23.45 25.18 28. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.11 26.33 21.95 Premium 26.20 27.95 22.39 21.73 26.51 25.74 21.03 24.45 28.45 20.83 25.59 28.83 23. Urban.37 27.43 20.45 29.45 24.88 28.33 21.81 28.81 21.39 22.33 22.88 22.38 24.39 22.82 21.45 20.15 20.15 29.02 23.07 24.01 22.59 28.76 25.04 26.40 25.49 21.48 25.76 24.26 27.42 24.08 25.83 24.03 21.49 31.Table H: Study Market Data .57 29.34 20.45 24.35 25.34 26.26 28.38 24.16 22.96 22.88 20.75 22. Tax (by Grade) Rack Pt.96 24.88 22.18 25.64 28.25 28.45 23.63 25.Rack Price.63 20.75 27.42 24.89 29.57 22.49 25.21 27.45 20.06 28.09 24.78 Product taxes Midgrade Regular 26.25 31.99 28. and All Study Markets are weighted (by market population) averages.08 23.51 31.97 25.39 Note: Regional.15 27.33 21.43 21.58 25.47 28.32 33.81 25.41 22.83 24.49 21.59 22.56 22.42 27.95 25.33 21.89 26.33 22.43 28.27 20.98 28.43 21.36 26.16 21.07 24.91 21.98 25.63 26.87 26.28 23.97 23.50 20.63 24.47 27.90 27.92 30.63 21.89 25.43 20.55 28.54 28.17 20.45 29.51 25.81 27.01 28.88 20.92 20.88 28.21 27.84 28.25 27.07 26.50 25.82 28.20 20.94 23.

86 28.06 28. Costs.75 28.17 1. Average Deviation is the average deviation of the market values from their mean (average) value.96 28.96 27.45 1.24 7.00 4.64 1. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.13 28.03 7.08 17.30 12.05 6.25 1.52 30.94 Note: Regional.42 2.33 9.31 0.80 1.36 0.28 1.82 32.10 3.12 6.58 66.88 31.35 60.99 0.43 23.93 56.64 2.57 12.60 14.01 0.21 8.07 0.66 28.22 1.29 7.15 66.73 10.Blended Prices.78 2.83 21.90 59.98 0.85 26.10 6.20 5.85 21.83 12.95 6.31 23.38 7.28 56.21 24.60 23.88 5.41 29.18 55.28 1.27 6.51 11.54 50.58 1.38 28.14 7.04 0.35 28.00 58.47 0.27 60.35 27.08 0.02 13.21 8.17 9. MJ ERVIN & ASSOCIATES 98 .60 7.79 0.63 58.63 60.31 34.19 5.04 23.83 27.02 0.26 5.01 31.50 10.85 11.35 58.50 0.06 0.53 21.38 0.00 0.18 7.31 28.11 26.033 0.95 21.04 22.20 14.82 95 Retail Gross Product Margin 6.22 5.73 2.43 0.59 4.56 24.73 1.13 0.38 2.49 2.91 29.12 23.99 2.93 22.80 9.89 28.38 22.04 28.06 5.08 3.17 26.27 11.96 3.27 62.14 60. and All Study Markets are weighted (by market population) averages.79 33.89 0.44 25.23 38.70 22.81 28.29 8.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.94 22.44 56.50 58.26 27.03 28.45 6.36 20.32 31.41 12.91 22.53 6.68 2.83 1.44 33.76 5.53 22.49 57.16 54.02 3.94 17.81 26.41 7.47 58.13 11.37 26.77 37.91 0.29 24.71 33.50 3.34 1.39 56.30 5.68 7.28 27.17 11.00 22.64 3.02 22.89 21.08 55.56 4.83 36.07 30.48 7.84 28.33 .75 23.91 2.82 3.16 20.73 22.26 3.97 0.16 3.(∑x)2 ]/n2.77 5.98 1.85 24.90 23.98 0.92 22.84 5.62 56.72 26.68 7.77 30. Variance uses the formula [n∑x2 .22 14.24 23.18 21. Urban.24 7.96 25.11 31.07 0.64 3.98 31.52 5.Table J: Study Market Data .86 49.34 0.23 7.

102 $ 223.120 $ 54.913 $ 139.394. outlet costs.572) $ (286.011.023 $ (15.272 $ 118.520 5.502 $ (80) $ 60. For 95 net retail petroleum revenue. Revenue.875 $ 255.866) $ (244.272 $ 210.208) $ (226.630 3.852) $ 119.526 $ 207.550 694. Urban.542 $ 222.074 $ 131.780 $ 85.604.622 $ 174. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.750 $ 271.209 $ 82.658.071. MJ ERVIN & ASSOCIATES 99 .289 981.250.837 $ 56.465.632 $ 256.095.772.066 3.478 4.375) $ (49.224 $ 189.900 2.129 $ 97.Sales.135 $ 199.794 3.241) $ (227.956) $ 200.246 $ 118.948 3.265.010 1.081 $ 222.746 $ (374.014.557) $ 102.694 3.719 3.032 $ 77.646) $ (98.638 2.885.900 $ 179.707 $ 260.800 $ 225.067 $ 92.247 4.995 $ 234.089.098.143) $ (249.157.623 2.766) $ (274.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.871) $ (128.934 3.542.209 $ 26.004. and consolidated outlet income these averages are based only on those markets with available data.716 Note: Regional.117 $ 207.Table K: Study Market Data . but for ancillary revenue.263 $ 60.429 $ 238.000 2.911) $ (166. these averages are based on all applicable study markets.144 2.197.855 $ 278.244 95 net retail Ancillary Revenue petroleum revenue $ 208.068 3.295 $ 174.648 3.640 4.000) $ (241. Outlet Costs.467 $ 96.544 $ 175.805.510 $ 60.058.223.564 $ 252.856 3.279 $ 154.098 $ (320.302 $ 69.626 $ 81.481 $ 96.966 3.013 $ 227.332) $ (238.217 2.827.000 $ 156.993 $ 113.550 $ 177.779 $ 121.688 $ 85.677 $ 180.367) $ (164. and All Study Markets are weighted (by market population) averages.890.

03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.73 14.88 12 7.095 3.47 14 3.40 1 3.975 2. of Outlets No.41 1.97 8.004 3.08 4 2.30 0.465 694 3.01 7 2.54 6 2.542.605 16.098 4.52 13 5.394 2.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.36 5.550 1.775 678.06 1 5.85 15 11.745 16.89 7.Table L: Study Market Data .275.02 0. rank* 3.27 1.071 2.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.315 710.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.48 7 7. MJ ERVIN & ASSOCIATES 100 .27 0.058 1.145 81.658 3.970 330.33 0.400 74.50 9.30 1. N refers to study sample size (total = 481). inverse ranking is used (lowest value = 1).265 2.17 19 9.45 0.73 5 10.089 3.827 3.91 12.06 16 4.51 9 11. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.60 11 7.29 1.53 10 6.250 981 2.98 6.38 0. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.47 7.000 pop’n No.08 3.22 3.04 15 4.310 1.775.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6. of Brands No.845 15.20 0.95 3 9.180 616.870 120.014 5.91 17 4.89 2 4.42 5 14.43 12.88 11 8.585 6.24 0.22 0.96 5.23 6 7.28 17.84 12 5.21 0.604 3.13 2 11.675 179.90 13 4.50 3 10.80 10 4.45 14.41 0.00 11.20 17 14.98 7.76 18 5.Demographic Profiles Population pop’n 299 .08 16 3.50 8.29 8 7.10 3.790 1.157 2.23 8 31.223 3.06 5.715 14.55 19 11.68 4 7.475 3.79 6.40 9 4.60 3.

Vice President Public Affairs Address: 275 Slater Street. safety and business issues. 119 .14th Street NW Calgary AB. Ottawa ON. Contact: Michael J. generate jobs and growth. and provide background resources to industry public affairs managers and the media. Principal Address: #400. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . Contact: Brendan Hawley. They maintain a large database of historical prices at most major centres. Ottawa ON. Petroleum Products Address: 235 Queen Street. aviation and lubricants marketing channels. Ottawa ON.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. The SCF is the basis for this study. accessible through a public fax-back dial-in system. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. Contact: Maureen Monaghan Address: 580 Booth Street. a series of studies whose goal is to strengthen Canada’s competitiveness.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. and in doing so. They work with major oil companies in benchmarking performance in the retail. health. Contact: Cindy Christopher. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). Senior Advisor. bulk. Ervin. cardlock. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision.

101 . Managing Editor Address: Suite 2450.6th Avenue.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. Contact: Gerard O’Connor. Contact: Robert Curran. and is a useful “window” on this industry. Executive Director Address: 214.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. Energy Section Address: Statistics Canada. Ottawa ON. 311 . Calgary AB. Supervisor. Octane is published quarterly. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 . Its monthly publication “Refined Petroleum Products” (cat. Contact: Len Bradley. SW Calgary.Octane Magazine Octane is Canada’s refining and marketing trade journal. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry.6th Ave. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. no 45-004) is a useful source of supply and demand volume data. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms.ab.

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